Experimental Economics and the Theory of Finance

Haim Levy ()
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Haim Levy: Hebrew University

Chapter 27 in Encyclopedia of Finance, 2022, pp 849-876 from Springer

Abstract: Abstract Experimental findings and in particular Prospect Theory and Cumulative Prospect Theory contradict Expected Utility Theory, which in turn may have a direct implication to theoretical models in finance and economics. We show growing evidence against Cumulative Prospect Theory. Moreover, even if one accepts the experimental results of Cumulative Prospect Theory, we show that most theoretical models in finance are robust. In particular, the CAPM is intact even if investors make decisions based on change of wealth, employ decision weights, and are risk-seeking in the negative domain.

Keywords: Certainty effect; Configural weights; Cumulative prospect theory; Decision weights; Expected utility; Markowitz stochastic dominance; Prospect stochastic dominance; Prospect theory; Stochastic dominance; Value function (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_27

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DOI: 10.1007/978-3-030-91231-4_27

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