We examined prospect theory and reference point adaptation following gains or losses using participants from China, Korea, and the US. Supporting prospect theory, we found in Studies 1 and 2 that subjects from all three countries generally exhibited loss aversion and a greater propensity for...

In this paper, we axiomatize a target-based model of choice that allows decision makers to be both risk averse and risk seeking, depending on the payoff's position relative to a pre- specified target. The approach can be viewed as a hybrid model, capturing in spirit two celebrated ideas: first,...

In this paper we present a two period model, where the agent's preferences are described by prospect theory as proposed by Kahneman and Tversky. We solve for the agent's portfolio decision. Our findings are that the changes in portfolio weights depend crucially on the reference point and the...

Failure is embarrassing. In gambles involving both skill and chance, we show that a strategic desire to avoid appearing unskilled generates behavioral anomalies that are typically explained by prospect theory’s concepts of loss aversion, probability weighting, and framing effects. Loss...

Reference dependence, loss aversion, and risk seeking for losses together comprise the preference-based component of prospect theory that sets its value function apart from the standard risk-aversion model. Using an elasticity analysis, we show that this distinctive preference component serves...

We study the asset allocation of a quadratic loss-averse (QLA) investor and derive conditions under which the QLA problem is equivalent to the mean-variance (MV) and conditional value-at-risk (CVaR) problems. Then we solve analytically the two-asset problem of the QLA investor for a risk-free...

Cumulative Prospect Theory (Kahneman, Tversky, 1979, 1992) holds that the value function is described using a power function, and is concave for gains and convex for losses. These postulates are questioned on the basis of recently reported experiments, paradoxes (gain-loss separability...

This paper focuses on the attitude of non-professional investors towards financial losses and their decisions on wealth allocation, and how these change subject to behavioral factors. Our contribution concerns the integration of behavioral elements into the classic portfolio optimization....

The 2007-08 financial crisis exposed poignant examples of ill-judged risk accretion in both tails of the Lorenz curve: concentrations of inappropriate mortgages within low-income neighborhoods, and concentrations of Bernard Madoff’s victims within wealthy, predominantly Jewish...

Financial well-being is distinct from income. Some people with high incomes suffer low financial well-being, as their incomes fall short of their aspirations. Such people feel propelled to reach their aspirations by taking risk and willing to bear losses. Conversely, some people with low incomes...