Bank Risk-Taking in a Prospect Theory Framework Empirical Investigation in the Emerging Markets' Case
20 Pages Posted: 13 Sep 2004
Date Written: July 2004
The purpose of this paper is to investigate the validity of some behavioral conjectures as alternative explanations of bank risk-taking behavior. We especially focus on the different valuation of gains and losses relative to a reference point, and the changing attitude toward risk conditional on the domain (gains vs losses) features (Tversky and Kahneman 1992). We follow a methodology based on Fiegenbaum and Thomas (1988) and the Fishburn (1977) measure of risk, applied to a sample of banks from emerging market economies. Preliminary results show that the Tversky and Kahneman (1992) framework could provide an alternative for explaining risk-taking behavior in the banking industry. Bankers located above benchmark levels, exhibit risk aversion. Although, further investigations are needed in order to consolidate our conclusions.
Keywords: Cumulative Prospect Theory, bank risk taking, emerging market economies
JEL Classification: C12, C31, D81, F39, G21
Suggested Citation: Suggested Citation