Evaluation with Dynamic Reference: Sustainable Investment

Leon Vinokur
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Leon Vinokur: Queen Mary, University of London

No 651, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: The Prospect Theory proposes to assess outcomes relative to a reference point (or benchmark). Although the literature recognises the relevance of dynamic benchmarks, most of the applications of Prospect Theory employ static reference points (or a status quo). This paper aims to develop a Prospect Theory framework for investment under uncertainty subject to a dynamic reference point, within the context of environmental policy making, where the distinction between a dynamic and a static frameworks is crucial. I evince that, in contrast to the static framework, in a dynamic framework the investor measures not only the absolute but also the relative risk premium (Sharpe ratio) of the investment opportunity, incorporating the risks and returns of a reference portfolio. I propose that there exists a relation between static and dynamic frameworks. Using the dynamic framework, I argue that in the environmental context international co-operation is the key to a successful environmental policy.

Keywords: Dynamic reference; Sustainable development (search for similar items in EconPapers)
JEL-codes: D46 G18 Q58 (search for similar items in EconPapers)
Date: 2009-10-01
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Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:651

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