Do Accounting and Finance Master’s Students Apply Prospect Theory?
Abstract
This study aims to question the assumptions of prospect theory using a sample of students enrolled in a master’s course on accounting and finance at a Portuguese polytechnic institution. Such theory has stood out among others developed in the field of Behavioural Finance due to the debate and investigation it has generated. To achieve this aim, we applied a questionnaire four consecutive years (2012–2015). The instrument included a set of alternative response questions that seek to unveil respondents’ preferences regarding the situations they were presented with. Bibliographic and descriptive research was carried out and the results were compared with those obtained by other authors but they were not always consistent. Thus, the isolation effect was confirmed; the reflection effect was almost always confirmed; and the certainty effect was not always confirmed. Regarding attitude toward risk, the assumptions of risk aversion, and importance given to changes in wealth (at the expense of wealth states), our results are in line with those obtained by said authors. Hence, this study contributes to support prospect theory with its results and the confirmation of the isolation effect.
References
Abdellaoui, M., Bleichrodt, H., & Kammoun, H. (2013). Do financial professionals behave according to prospect theory? An experimental study. Theory and Decision, 74(3), 411-429. https://doi.org/10.1007/s11238-011-9282-3
Abdellaoui, M., Bleichrodt, H., & Paraschiv, C. (2007). Loss Aversion Under Prospect Theory: A Parameter-Free Measurement. Management Science, 53(10), 1659-1674. https://doi.org/10.1287/mnsc.1070.0711
Angelovska, J. (2015). Macedonian small investors’ behaviour towards stock market. Zagreb International Review of Economics & Business, 18(1), 51-60. https://doi.org/10.1515/zireb-2015-0003
Ardalan, K. (2018). The “modern” in “modern finance”: A multi-paradigmatic look. Research in International Business and Finance, 45, 475-487. https://doi.org/10.1016/j.ribaf.2017.08.001
Ariely, D., Huber, J., & Wertenbroch, K. (2005). When do losses loom larger than gains? Journal of Marketing Research, 42, 134-138. https://doi.org/10.1509/jmkr.42.2.134.62283
Bakar, S., & Yi, A. N. C. (2016). The impact of psychological factors on investors’ decision making in malaysian stock market: A case of Klang Valley and Pahang. Procedia Economics and Finance, 35, 319-328. https://doi.org/10.1016/S2212-5671(16)00040-X
Barberis, N. C. (2013). Thirty Years of Prospect Theory in Economics: A Review and Assessment. Journal of Economic Perspectives, 27(1), 173-196. https://doi.org/10.1257/jep.27.1.173
Booij, A., van Praag, B. M. S., & van de Kuilen, G. A. (2010). A parametric analysis of prospect theory’s functional for the general population. Theory and Decision, 68(1-2), 115-148. https://doi.org/10.1007/s11238-009-9144-4
Bromiley, P. (2010). Looking at prospect theory. Strategic Management Journal, 31(12), 1357-1370. https://doi.org/10.1002/smj.885
De Bondt, W. F. M., Shefrin, H., Muradoglu, Y. G., & Staikouras, S. K. (2008). Behavioural finance: Quo vadis? Journal of Applied Finance, 19, 7-21. https://ssrn.com/abstract=1306730
Dodd, D. & Graham, B. (1996). Security analysis: the classic 1934 edition. McGraw-Hill.
Dow, J. (1894). History of the Town of Hampton, New Hampshire: From Its Settlement in 1638, to the Autumn of 1892 (Vol. 2). Salem Press Publishing and Printing Company.
Duclos, R. (2015). The psychology of investment behavior: (De)biasing financial decision-making one graph at a time. Journal of Consumer Psychology, 25(2), 317-325. https://doi.org/10.1016/j.jcps.2014.11.005
Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383-417. https://doi.org/10.2307/2325486
Fama, E. F., & French, K. R. (1988). Permanent and Temporary Components of Stock Prices. Journal of Political Economy, 96(2), 246-273. https://doi.org/10.1086/261535
Fama, E. F. (1998). Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics, 49(3), 283-306. https://doi.org/10.1016/S0304-405X(98)00026-9
French, K. R., & Roll, R. (1986). Stock return variances: The arrival of information and the reaction of traders. Journal of Financial Economics, 17(1), 5-26. https://doi.org/10.1016/0304-405X(86)90004-8
Greenberg, M., & Lowrie, K. (2012). Daniel Kahneman: How We Think and Choose. Risk Analysis, 32(7), 1113-1116. https://doi.org/10.1111/j.1539-6924.2012.01865.x
Haigh, M. S., & List, J. A. (2005). Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis. The Journal of Finance, 60(1), 523-534. https://doi.org/10.1111/j.1540-6261.2005.00737.x
Hamilton, W. P. (1922). The Stock Market Barometer: A Study of Its Forecast Value Based on Charles H. Dow's Theory of the Price Movement. With an Analysis of the Market and Its History Since 1897. Harper & Brothers
Haubert, F. L. C., Lima, C. R. M., & Lima, M. V. A. (2014). Finanças Comportamentais: uma investigação com base na teoria do prospecto e no perfil do investidor de estudantes de cursos stricto sensu portugueses. Revista de Ciências da Administração, 16(38), 183-195. https://doi.org/10.5007/2175-8077.2014v16n38p183
Haugen, R. A. (2000). Os Segredos Da Bolsa - Como Prever Resultados E Lucrar Com Ações. Pearson Education.
Henderson, P. W., & Peterson, R. A. (1992). Mental accounting and categorization. Organizational Behavior and Human Decision Processes, 51(1), 92-117. https://doi.org/10.1016/0749-5978(92)90006-S
Hertwig, R., Pachur, T., & Kurzenhäuser, S. (2005). Judgments of Risk Frequencies: Tests of Possible Cognitive Mechanisms. Journal of Experimental Psychology: Learning, Memory, and Cognition, 31(4), 621-642. https://doi.org/10.1037/0278-7393.31.4.621
Joo, B. A., & Durri, K. (2015). Comprehensive review of literature on behavioural finance. Indian Journal of Commerce and Management Studies, 6(2), 11-19. http://www.scholarshub.net/index.php/ijcms/article/view/371
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-292. https://doi.org/10.2307/1914185
Kimura, H., Basso, L. F. C., & Krauter, E. (2006). Paradoxos em Finanças: Teoria Moderna Versus Finanças Comportamentais. RAE - Revista de Administração de Empresas, 46(1), 41-58. http://dx.doi.org/10.1590/S0034-75902006000100005
Kleinübing Godoi, C., Marcon, R., & Barbosa daSilva, A. (2005). Loss aversion: A qualitative study in behavioural finance. Managerial Finance, 31(4), 46-56. https://doi.org/10.1108/03074350510769613
Kyle, A. S., Ou-Yang, H., & Xiong, W. (2006). Prospect theory and liquidation decisions. Journal of Economic Theory, 129(1), 273-288. https://doi.org/10.1016/j.jet.2005.02.006
Lavoie, M., & Daigle, G. (2011). A behavioural finance model of exchange rate expectations within a stock‐flow consistent framework. Metroeconomica, 62(3), 434-458. https://doi.org/10.1111/j.1467-999X.2010.04116.x
Lewandowski, M. (2017). Prospect Theory Versus Expected Utility Theory: Assumptions, Predictions, Intuition and Modelling of Risk Attitudes. Central European Journal of Economic Modelling and Econometrics, 9(4), 275-321. https://EconPapers.repec.org/RePEc:psc:journl:v:9:y:2017:i:4:p:275-321
Lo, A. W., & MacKinlay, A. C. (1988). Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test. The Review of Financial Studies, 1(1), 41-66. https://doi.org/10.1093/rfs/1.1.41
Loeb, G. M. (1935). The battle for investment survival. John Wiley and Sons.
Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91. http://links.jstor.org/sici?sici=0022-1082%28195203%297%3A1%3C77%3APS%3E2.0.CO%3B2-1
Miller, M. H., & Modigliani, F. (1961). Dividend Policy, Growth, and the Valuation of Shares. The Journal of Business, 34(4), 411-433. https://www.jstor.org/stable/2351143
Novemsky, N., & Kahneman, D. (2005). Boundaries of loss aversion. Journal of Marketing Research, 42(2), 119-128. https://doi.org/10.1509/jmkr.42.2.119.62292
Philippon, T., & Reshef, A. (2013). An International Look at the Growth of Modern Finance. Journal of Economic Perspectives, 27(2), 73-96. https://doi.org/10.1257/jep.27.2.73
Rabin, M., & Thaler, R. H. (2001). Anomalies: Risk aversion. Journal of Economic Perspectives, 15(1), 219-232. https://doi.org/10.1257/jep.15.1.219
Rhea, R. (1932). The Dow Theory. Barron's.
Seth, R., & Chowdary, B. A. (2017). Behavioural Finance: A Re-Examination of Prospect Theory. Theoretical Economics Letters, 7, 1134-1149. https://doi.org/10.4236/tel.2017.75077
Sharpe, W. F. (1963). A Simplified Model for Portfolio Analysis. Management Science, 9(2), 171-349. https://doi.org/10.1287/mnsc.9.2.277
Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. The Journal of Finance, 19(3), 425-442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
Shefrin, H. (2015). The behavioural paradigm shift. RAE - Revista de Administração de Empresas, 55(1), 95-98. https://dx.doi.org/10.1590/S0034-759020150109
Shefrin, H., & Statman, M. (2000). Behavioural portfolio theory. The Journal of Financial and Quantitative Analysis, 35(2), 127-151. https://doi.org/10.2307/2676187
Shiller, R. J. (2003). From Efficient Markets Theory to Behavioral Finance. Journal of Economic Perspectives, 17(1), 83-104. https://doi.org/10.1257/089533003321164967
Statman, M. (1999). Behaviorial Finance: Past Battles and Future Engagements. Financial Analysts Journal, 55(6), 18-27. https://doi.org/10.2469/faj.v55.n6.2311
Subrahmanyam, A. (2008). Behavioural Finance: A Review and Synthesis. European Financial Management, 14(1), 12-29. https://doi.org/10.1111/j.1468-036X.2007.00415.x
Stout, L. A. (2003). The Mechanisms of Market Inefficiency: An Introduction to the New Finance. The Journal of Corporation Law, 28(4), 635-669. http://dx.doi.org/10.2139/ssrn.470161
Thaler, R. H. (1999). The end of behavioural finance. Financial Analysts Journal, 55(6), 12-17. https://doi.org/10.2469/faj.v55.n6.2310
Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, New Series, 211(4481), 453-458. https://doi.org/10.1126/science.7455683
Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5(4), 297-323. https://doi.org/10.1007/BF00122574