Behavioural Finance: A User-Oriented Procedure to Assessing Preferences Under Risk

6 Pages Posted: 14 Jun 2014

See all articles by Robert Bordley

Robert Bordley

University of Michigan at Ann Arbor

Luisa Tibiletti

University of Turin - Department of Management

Mariacristina Uberti

University of Turin

Date Written: June 12, 2014

Abstract

According to the behavioral finance theory, agents act coherently with the Kahneman and Tversky prospect paradigms and may violate those dictated by the rational expected utility. From the point of view of real financial markets’ applications, a key question concerns how to eliciting the financial professionals’ risk preferences. In this contribution we propose the benchmarking procedure originally set up by Castagnoli and LiCalzi (1996) and Bordley and LiCalzi (2000) that couples sound axiomatic fundamentals with a user-friendly language. According to the benchmarking modelling, to maximizing the expected cardinal utility is equivalent to maximizing the probability to meet a (uncertain) goal. It follows that the subjective preferences under risk can be expressed in terms of the probability of matching financial benchmarks. Since practitioners may feel more comfortable in answering questions involving perceived probability of meeting commitments than expressing preferences on lotteries’ outcomes, the use of the benchmarking modelling is expected to reduce inconsistency in questionnaires.

Keywords: Prospect Theory, Behavioral Finance, Value function assessment, Loss aversion, Benchmarking procedure

JEL Classification: D81, G11

Suggested Citation

Bordley, Robert and Tibiletti, Luisa and Uberti, Mariacristina, Behavioural Finance: A User-Oriented Procedure to Assessing Preferences Under Risk (June 12, 2014). Available at SSRN: https://ssrn.com/abstract=2449328 or http://dx.doi.org/10.2139/ssrn.2449328

Robert Bordley

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Luisa Tibiletti (Contact Author)

University of Turin - Department of Management ( email )

C.so Unione Sovietica, 218 bis
Turin, Turin 10100
Italy
39-11-670-6229 (Phone)
39-11-670-6238 (Fax)

HOME PAGE: http://www.management.unito.it/tibiletti

Mariacristina Uberti

University of Turin ( email )

Via Po 53
Torino, Turin - Piedmont 10100
Italy

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