Hello,
EOC question #5 page 45-46 has answer C
Can anyone elaborate on why it’s not answer A - Prospect theory? it says in the answer key that “loss aversion in prospect theory is discussed from a different perspective”
not sure I understand that? we have 2 phases and then our subjective probabilities which leads to risk seeking behavior.
Prospect theory would indicate that individuals hold onto their losers too long. it is based on a reference point as well.
Hopefully, someone can shed some light on the “different perspective”.
Thank you,作者: Houjichasan 时间: 2013-5-3 11:04
what are you trying to say? it is not an equal change here … so where did the equal change appear on your statement from?作者: YAhmed 时间: 2013-5-3 11:07
hit it from the side like a bass drum作者: ba736 时间: 2013-5-3 11:08
Here is what we thought:
Prospect theory is a framework that attempts to describe the decision making process made by a human being and non-rational investor. Utility theory is the opposite, the framework for the rational investor, which is based on an absolute frame rather than a subjective one.
Utility theory tell us how to construct a portfolio in an objective manner, and comes up with mean-variance optimization. But in reality, many construct portfolios differently, for example they exhibit loss aversion.
This loss aversion is reflected in the example by the different bounds for selling a gain and a loss. A loss is only sold at -25%, presumably to allow a smaller loss to re-gain in value because the investor does not want to accept a loss easily.
Behavoural portfolio theory describes this and other phenomena which gives rise to different portfolios than those prescribed by mean-variance derived from utility theory.
Prospect theory is not the right answer, because it is a decision making framework which is probably the basis of behavioural portfolio theory BUT ONLY for specific frame that for example give rise to loss aversion. It says how we decide, and BPT says how we construct portfolios based on the how.
