Prospect Theory and Fat Tails
Risk and Decision Analysis, Vol. 1, No. 3, pp. 187-195, 2009
21 Pages Posted: 8 May 2009 Last revised: 30 Jun 2009
Abstract
A behavioral representative investor who evaluates a single risky asset based on cumulative prospect theory will often induce high kurtosis, negative skewness, and persistent autocorrelation into the distribution of market returns even if the asset payoffs are merely a sequence of independent coin tosses. These findings continue to hold even when the investor is simply loss averse.
Keywords: prospect theory, loss aversion, kurtosis, skewness, autocorrelation, fat tails
JEL Classification: G12, G10, G19
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
By John Y. Campbell and John H. Cochrane
-
By Force of Habit: A Consumption-Based Explanation of Plantation of Aggregate Stock Market Behavior
By John Y. Campbell and John H. Cochrane
-
Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing
By John Heaton and Deborah J. Lucas
-
Asset Prices Under Habit Formation and Catching Up with the Joneses
-
Implications of Security Market Data for Models of Dynamic Economies
-
Myopic Loss Aversion and the Equity Premium Puzzle
By Shlomo Benartzi and Richard H. Thaler