Do financial professionals behave according to prospect theory? An experimental study

Mohammed Abdellaoui, Han Bleichrodt and Hilda Kammoun
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Hilda Kammoun: GRID - Groupe de Recherche sur le risque, l'Information et la Décision - ENS Cachan - École normale supérieure - Cachan - CNRS - Centre National de la Recherche Scientifique

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Abstract: Prospect theory is increasingly used to explain deviations from the traditional paradigm of rational agents. Empirical support for prospect theory comes mainly from laboratory experiments using student samples. It is obviously important to know whether and to what extent this support generalizes to more naturally occurring circumstances. This article explores this question and measures prospect theory for a sample of private bankers and fund managers. We obtained clear support for prospect theory. Our financial professionals behaved according to prospect theory and violated expected utility maximization. They were risk averse for gains and risk seeking for losses and their utility was concave for gains and (slightly) convex for losses. They were also averse to losses, but less so than commonly observed in laboratory studies and assumed in behavioral finance. A substantial minority focused on gains and largely ignored losses, behavior reminiscent of what caused the current financial crisis.

Keywords: Prospect theory; Loss aversion; Field data; Behavioral finance; Experimental economics (search for similar items in EconPapers)
Date: 2013-03
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Citations: View citations in EconPapers (53)

Published in Theory and Decision, 2013, 74 (3), pp.411-429. ⟨10.1007/s11238-011-9282-3⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01069185

DOI: 10.1007/s11238-011-9282-3

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