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Behavioral Finance: Implementation of Prospect Theory in the Process of Making Investment Decisions


Viktoriya Goretskaya
(about the author)

Goretskaya Viktoriya Antonovna – Postgraduate Student, Senior Lecturer of the Academic Department of Financial Management, Plekhanov Russian University of Economics, Moscow

Published in:
Russian Journal of Entrepreneurship
– № 13 / July, 2013



Keywords: behavioral finance, decision weights, narrow framing, prospect theory, value function


Citation:
Viktoriya Goretskaya (2013). Behavioral Finance: Implementation of Prospect Theory in the Process of Making Investment Decisions. Russian Journal of Entrepreneurship, 14(13), 104-110. — url: http://bgscience.ru/com/lib/4309


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Abstract:

Prospect theory is widely used model for subjective risk evaluation. Challenges in applying prospect theory are insufficiently developed methodology for clarifying key definitions: reference point, gain and losses. Prospect theory is actively applied in finance. There are three main application areas: the cross section of average returns; the aggregate stock market; the trading of financial assets over time. Positively skewed stock offers low average return. Risk aversion and narrow framing reduce investment opportunities. Disposition effect follows from the convexity of the prospect theory value function in the region of losses.







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