e-journal

Testing dominant theories and assumptions in behavioral finance

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Purpose – The purpose of this paper is to empirically test dominant theories and assumptions in
behavioral finance, using data from the Standard & Poor’s 500 index.
Design/methodology/approach – The empirical analysis has three parts: to test the assumption of
risk aversion; to examine the dominant theory that the optimal portfolio depends on risk preferences;
and to test prospect theory that decision makers prefer certain outcomes over probable outcomes.
Finally, an alternative model to test prospect theory is introduced.
Findings – The proposed model is more flexible than prospect theory since it does not a priori
assume what value of the portfolio induces risk aversion/seeking, while it does not a priori preclude
linear preferences. Empirical results show that: investors are risk seeking; a change in the sign of
preferences does not necessarily imply a change in the sign of wealth/return and vice versa; and the
optimal portfolio does not depend on preferences.
Practical implications – These findings are helpful to risk managers dealing with models of
behavioural finance.
Originality/value – The contribution of this paper is that it successfully tests fundamental theories and
assumptions in behavioral finance by providing a better alternative to prospect theory in several ways.

Keywords Behavioural economics, Investors, Expectation, Financial forecasting, Risk aversion,Dominant theory, Prospect theory, S&P500

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Ketersediaan

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Informasi Detail

Judul Seri

The Journal of Risk Finance

No. Panggil

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Penerbit

: Emerald Group., 2012

Deskripsi Fisik

The Journal of Risk Finance Vol. 13 No. 3, 2012 pp. 262-268

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

EKONOMI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

Versi lain/terkait

Lampiran Berkas

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