We examine how the evidence of mean-reversion in stock returns affects dynamic trading behavior for investors with prospect-theory preferences. Particular attention is paid to the trading incentives created by the interaction between prospect-theory preferences and mean-reverting return...

We formulate and study a general multi-period behavioral portfolio selection model under Kahneman and Tversky's prospect theory, featuring an incomplete market and an S-shaped utility function. We first discuss the ill-posedness issue under a multi-period framework and identify the conditions...

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...