Theories of choice under risk: Insights from financial markets
To date, the plausibility of theories of choice under risk hinges are mainly on experimental evidence. This paper devises and implements an approach amenable of assessing the performance of three families of models (expected utility, rank-dependent expected utility, and the cumulative prospect theory) using information from financial asset markets. Our findings unequivocally support reference-point dependence, diminishing marginal sensitivity, loss aversion, and nonlinear weighting of (gain and loss) physical probabilities. The empirical observations are found to be robust to, inter alia, the parameterization of the utility and probability weighting functions, "day-of-the-week effects", the choice of a reference point, and the introduction of possible, low-probability market crashes (peso component).
Year of publication: |
2009
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Authors: | Kliger, Doron ; Levy, Ori |
Published in: |
Journal of Economic Behavior & Organization. - Elsevier, ISSN 0167-2681. - Vol. 71.2009, 2, p. 330-346
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Publisher: |
Elsevier |
Keywords: | Cumulative prospect theory Expected utility Market data Rank-dependent expected utility |
Saved in:
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