BEHAVIORAL FINANCE, Kevin Baker, John Nofsinger, eds., Wiley Publishing, Forthcoming
Posted: 22 Jan 2010
Date Written: January 20, 2010
Prospect theory provides better descriptions of choice behavior than that of conventional models especially in a world of uncertainty, which characterizes financial markets and decision making. Of particular importance is the introduction and development of the concepts of the differential treatment of loss and gains, emotive considerations, loss aversion, and reference points as key decision-making variable. Prospect theory questions the rationality in decision making. However, this chapter argues that prospect theory-like behavior can be rational, albeit non neoclassical, with important potential public policy implications.
Keywords: Prospect theory, Choice behaviour, Uncertainty, Financial Markets, Decision Making, Rationality
JEL Classification: D03, D81
Suggested Citation: Suggested Citation