Development of a Behavioral Performance Measure

Marcelo Klotzle, Leonardo Lima Gomes (), Luiz Eduardo Teixeira Brandão () and Antonio Carlos Figueiredo Pinto ()
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Leonardo Lima Gomes: Pontifícia Universidade Católica do Rio de Janeiro
Luiz Eduardo Teixeira Brandão: Pontifícia Universidade Católica do Rio de Janeiro
Antonio Carlos Figueiredo Pinto: Pontifícia Universidade Católica do Rio de Janeiro

Brazilian Review of Finance, 2012, vol. 10, issue 3, 395-416

Abstract: Since the fifties, several measures have been developed in order to measure the performance of investments or choices involving uncertain outcomes. Much of these measures are based on Expected Utility Theory, but since the nineties a number of measures have been proposed based on Non-Expected Utility Theory. Among the Theories of Non-Expected Utility highlights Prospect Theory, which is the foundation of Behavioral Finance. Based on this theory this study proposes a new performance measure in which are embedded loss aversion along with the likelihood of distortions in the choice of alternatives. A hypothetical example is presented in which various performance measures, including the new measure are compared. The results showed that the ordering of the assets varied depending on the performance measure adopted. According to what was expected, the new performance measure clearly has captured the distortion of probabilities and loss aversion of the decision maker, ie, those assets with the greatest negative deviations from the target were those who had the worst performance.

Keywords: Behavioral Finance; Prospect Theory; Performance Measure (search for similar items in EconPapers)
JEL-codes: G02 G11 (search for similar items in EconPapers)
Date: 2012
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