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

See all articles by Philip Maymin

Philip Maymin

Fairfield University - Charles F. Dolan School of Business; Athletes Unlimited

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

Maymin, Philip, Prospect Theory and Fat Tails. Risk and Decision Analysis, Vol. 1, No. 3, pp. 187-195, 2009, Available at SSRN: https://ssrn.com/abstract=1401131

Philip Maymin (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

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