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Asymmetric reaction is rational behavior

Philip A. Horvath () and Amit K. Sinha ()
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Philip A. Horvath: Bradley University
Amit K. Sinha: Bradley University

Journal of Economics and Finance, 2017, vol. 41, issue 1, No 9, 160-179

Abstract: Abstract De Bondt and Thaler (Int J Fore 9(3):355–371, 1995) point out that while von Neumann-Morgenstern (1947) utility functions, the axioms of cardinal utility (Copeland and Weston 1988), risk aversion, rational expectations, etc., have formed the basis for theories of choice under uncertainty, research in behavioral science, has either challenged these foundations or outright rejected them. Requiring investors to be utility maximizers, and using an approach similar to Scott-Horvath (J Financ 35(4):915–9¸1980), and arguing investors’ to have different utility for partial upper and partial lower moments, this paper proves that loss, regret, and myopic loss aversion and sign effects, is in fact central to understanding of rational behavior.

Keywords: Loss aversion; Regret aversion; Sign effect; Utility theory; Valence; Risk preference; Moments; Risk premia (search for similar items in EconPapers)
JEL-codes: D03 D84 G00 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s12197-015-9344-4

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Handle: RePEc:spr:jecfin:v:41:y:2017:i:1:d:10.1007_s12197-015-9344-4