 Can prospect theory be used to predict an investor’s willingness to pay?Carsten Erner, Alexander Klos and Thomas Langer Journal of Banking & Finance, 2013, vol. 37, issue 6, 1960-1973 Abstract: Cumulative prospect theory (CPT) is widely considered to be the most successful descriptive theory for decision making under risk and uncertainty. Sophisticated methods have been developed to reliably elicit CPT parameters on an individual basis. The aim of this paper is to analyze whether such methods are suited to be applied in real world situations, particularly in the context of investment counseling for retail investors. Specifically, we examine whether CPT parameters elicited via standardized computer tools are successful in predicting an individual’s preference for different structured financial products. Surprisingly, we find only low predictive power of the elicited CPT parameters on the WTP. Using a second set of experiments, we examine possible explanations for the low prediction quality. Overall, we have to conclude that it is too much of a leap to draw conclusions about the attractiveness of complex financial products from CPT parameters elicited via simple lotteries. Keywords: Cumulative prospect theory; Preference elicitation; Retail investor; Behavioral finance; Structured financial product (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:6:p:1960-1973 DOI: 10.1016/j.jbankfin.2012.12.008 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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