Prospect Theory, Market Forces & Investor Satisfaction

Abstract

Modern finance theories are built on the foundation of Neoclassical economics, which says that humans are always rational, in decision making. Expected Utility Theory (EUT) of neoclassical economics states that humans make decisions primarily based on the "utility" to be derived from a decision. After all, the theory is a way to explain an empirical observation. Prospect theory an alternative to expected utility theory proves that humans are not always rational in taking decisions. Loss aversion, Regret aversion, Mental accounting, are the factors considered in prospect theory for influencing the decision maker's behavior. Behavioral finance which deals with psychological aspects of investors in taking financial decisions, details about the various biases and heuristics which cause behavioral differences or irrationality in taking financial decisions. In this study, we have collected data from 100 respondents (investors) to know the impact and influence of various prospect and market variables on investor satisfaction. Tools like ANOVA and Regression have been used to analyze the collected data. The result shows that not all the prospect factors and Market forces have an influence on the satisfaction of the investors.

Keywords: Behavioral Finance, Loss Aversion, Bias, Mental Accounting, Segregation