prospect theory

  • 详情 Reference point adaptation: Tests in the domain of security trading
    According to prospect theory [Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk, Eco- nometrica, 47, 263–292], gains and losses are measured from a reference point. We attempted to ascertain to what extent the refer- ence point shifts following gains or losses. In questionnaire studies, we asked subjects what stock price today will generate the same utility as a previous change in a stock price. From participants’ responses, we calculated the magnitude of reference point adapta- tion, which was significantly greater following a gain than following a loss of equivalent size. We also found the asymmetric adap- tation of gains and losses persisted when a stock was included within a portfolio rather than being considered individually. In studies using financial incentives within the BDM procedure [Becker, G. M., DeGroot, M. H., & Marschak, J. (1964). Measuring utility by a single-response sequential method. Behavioral Science, 9(3), 226–232], we again noted faster adaptation of the reference point to gains than losses. We related our findings to several aspects of asset pricing and investor behavior.
  • 详情 In victory or defeat: Consumption responses to wealth shocks
    Using four datasets of individuals’ digital payment and mutual fund investment records from a dominating fintech platform, we observe a robust U-shaped relation between individuals’ consumption and their financial wealth shocks. Contrary to the prediction of the wealth effect, individuals increase their consumption shortly after experiencing large positive and negative wealth shocks. The unexpected increase in consumption following negative wealth shocks is particularly pronounced among consumption categories with a “hedonic” nature, such as entertainment-related items. We show that this effect, termed “financial retail therapy,” is consistent with a dynamic model of Prospect Theory and evidence from a controlled laboratory experiment.
  • 详情 Investor Sentiment Index Based on Prospect Theory: Evidence from China
    Investor sentiment has a crucial impact on stock market pricing. Based on prospect theory and partial least squares, we innovatively construct an investor sentiment indicator and verify the validity of the indicator. Compared with other sentiment indices, our investor sentiment index is more effective in in-sample and out-of-sample forecasting. At the same time, from a cross-sectional perspective, both the portfolio analysis and the Fama-Macbeth regression show that the partial least squares results are a better indicator of returns than other indices. The driving force of the sentiment index we construct comes from investors’ perceptions of forecast cash ffow, discount rate, and volatility.
  • 详情 How Does Farming Culture Shape Households’ Risk-taking Behavior?
    Does the ancient farming culture shape the risk-taking behavior of households today? Using a dataset covering over 130,000 households from a Chinese national survey, our study examines the relationship between the culture of rice cultivation and the financial behavior of modern households. We find that households in regions with a higher rate of historical rice cultivation are more likely to invest in the financial market and buy lottery, but less likely to purchase insurance. We also find that the rice area has more households with risk preferences consistent with prospect theory expectations. To account for omitted variable bias, we use average regional rainfall and downstream distance to ancient irrigation systems as instrumental variables for rice cultivation, and our results remain robust. We find that the rice effect cannot be explained by regional economic development, traditional Confucian values, or ethnic diversity. To explore potential mechanisms, we find that households in rice regions are more likely to borrow money from friends and relatives and have interest waived, and historical commercial development has also been influenced by the rice culture.
  • 详情 Insurance Demand Over Varying Coverage Levels: Experimental Evidence from China
    Low demand for crop insurance, even when subsidized at highly favorable rates, remains a challenge for policymakers in developing countries attempting to create insurance-based farm safety nets. Evidence from a series of surveys and experiments with 477 vegetable farmers in China reveals several anomalies in farmers’ demand for crop insurance as well as deviations from predictions under both expected utility theory and cumulative prospect theory. Farmers are willing to pay higher price for neutral-frame risk protection tool than for an insurance-frame equivalent. Moreover, they tend to be more likely to purchase low-coverage than high-coverage insurance, even when high coverage provides greater subsidized value. Among risk- and loss-averse farmers, who theoretically should be more interested in adopting risk protection tools, we find less willingness to purchase high-coverage level insurance.
  • 详情 Market Crowd’s Trading Behaviors, Agreement Prices, and the Implications of Trading Volume (市场群体的交易行为、认同价格以及交易量的内涵)
    It has been long that literature in financial academics focuses mainly on price and return but much less on trading volume. In the past twenty years, it has already linked both price and trading volume to economic fundamentals, and explored the behavioral implications of trading volume such as investor’s attitude toward risks, overconfidence, disagreement, and attention etc. However, what is surprising is how little we really know about trading volume. Here we show that trading volume probability represents the frequency of market crowd’s trading action in terms of behavior analysis, and test two adaptive hypotheses relevant to the volume uncertainty associated with price in China stock market. The empirical work reveals that market crowd trade a stock in efficient adaptation except for simple heuristics, gradually tend to achieve agreement on an outcome or an asset price widely on a trading day, and generate such a stationary equilibrium price very often in interaction and competition among themselves no matter whether it is highly overestimated or underestimated. This suggests that asset prices include not only a fundamental value but also private information, speculative, sentiment, attention, gamble, and entertainment values etc. Moreover, market crowd adapt to gain and loss by trading volume increase or decrease significantly in interaction with environment in any two consecutive trading days. Our results demonstrate how interaction between information and news, the trading action, and return outcomes in the three-term feedback loop produces excessive trading volume which includes various internal and external causes. Finally, we reconcile market dynamics and crowd’s trading behaviors in a unified framework by Shi’s price-volume differential equation in stock market where, we assume, investors derive a liquidity utility expressed in terms of trading wealth which is equal to the sum of a probability weighting utility and a reversal utility in reference to an outcome. JEL Classifications: G12, G02, D83 (长期以来,金融学术领域里的文献只注重价格和收益率,却较少研究交易量。在最近的二十年里,金融学术文献已经开始研究价格和交易量两者与经济基本量之间的相互关系,并且探讨交易量的行为内涵,例如投资者对风险的态度、过度自信、不同观点以及关注程度等等。然而,我们还是对交易量的认识知之甚少。本文根据行为分析,用交易量概率来表示市场群体的交易频率,并且通过我国股市来实证检验涉及交易量与价格之间不确定关系的两种适应性假说。实证结果表明:市场群体在每日交易的时间窗口内除了采用简单的经验法则之外,同时还采用有效的适应性方式来从事股票交易,并且逐步倾向于形成一个结果和认同的资产价格;无论该资产价格是否明显地被高估或低估,市场群体在相互作用和竞争的过程中往往能够形成这样一个稳态的均衡价格。这表明了资产价格不仅包含了基本价值同时还包含了非公开信息、投机、情绪、关注、赌博和娱乐等价值。此外,在任意两个连续交易日之间,市场群体在与市场环境的相互作用过程中,通过交易量的增加或减少来有效地适应盈亏。我们的研究结果说明了在由信息、交易与收益结果三项构成的反馈环中,它们之间的相互作用是如何导致了过度交易的,这其中包含了导致过度交易的各种内外因素。最后,我们假设股票市场中的投资者是通过交易财富来产生流动性效用,它等于概率加权效用与相对于结果为参照系的反转效用之和,从而推导出Shi氏价-量微分方程,将市场动力学行为与群体交易行为协调在一个统一的框架体系。)
  • 详情 Market Crowd's Trading Behaviors, Agreement Prices, and the Implications of Trading Volume (市场群体的交易行为、认同价格以及交易量的内涵)
    It has been long that literature in financial academics focuses mainly on price and return but much less on trading volume. In the past twenty years, it has already linked both price and trading volume to economic fundamentals, and explored the behavioral implications of trading volume such as investor’s attitude toward risks, overconfidence, disagreement, and attention etc. However, what is surprising is how little we really know about trading volume. Here we show that trading volume probability represents the frequency of market crowd’s trading action in terms of behavior analysis, and test two crowd’s trading behavioral hypotheses relevant to the volume uncertainty associated with price in China stock market. The empirical work reveals that market crowd trade in simple heuristics and efficient adaptation, gradually tend to achieve agreement on an outcome or an asset price widely on a trading day, and generate such a stationary equilibrium price very often in interaction among themselves no matter whether it is highly overestimated or underestimated, suggesting that asset prices include not only a fundamental value but also private information, speculative, sentiment, gamble, and entertainment values etc. In addition, market crowd adapt to gain and loss by trading volume increase or decrease significantly in interaction with environment in any two consecutive trading days. Our results demonstrate how interaction between information and news, the trading action, and return outcomes in the three-term feedback loop produces excessive trading volume which includes various internal and external causes. Finally, we reconcile market dynamics and crowd’s trading behaviors in a unified framework by Shi’s price-volume differential equation in stock market where, we assume, investors derive a liquidity utility expressed in terms of trading wealth which is equal to the sum of a probability weighting utility and a reversal utility in reference to an outcome. JEL Classifications: G12, G02, D83 (长期以来,金融学术领域里的文献只注重价格和收益率,却较少研究交易量。在最近的二十年里,金融学术文献已经开始研究价格和交易量两者与经济基本量之间的相互关系,并且探讨交易量的行为内涵,例如投资者对风险的态度、过度自信、不同观点以及关注程度等等。然而,我们还是对交易量的认识知之甚少。本文根据行为分析,用交易量概率来表示市场群体的交易频率,并且通过我国股市来实证检验交易量与价格之间不确定关系中关于群体交易行为的两个基本假说。实证结果表明:市场群体在每日交易的时间窗口内采用简单的经验法则和有效的适应方式来从事交易,并且总是逐步地倾向于形成一个结果和认同的资产价格;无论该资产价格是否明显地被高估或低估,市场群体在相互作用的过程中往往能够形成这样一个稳态的均衡价格,这表明了资产价格不仅包含基本价值同时还包含非公开信息、投机、情绪、赌博和娱乐等价值。此外,在任意两个连续交易日之间,市场群体在与市场环境的相互作用过程中,通过交易量的增加或减少来有效地适应盈亏。我们的研究结果说明了在由信息、交易与收益结果三项构成的反馈环中,它们之间的相互作用是如何导致了过度交易的,这其中包含了导致过度交易的各种内外因素。最后,我们假设股票市场中的投资者是通过交易财富来产生流动性效用,它等于概率加权效用与相对于结果为参照系的反转效用之和,从而推导出Shi氏价-量微分方程,将市场动力学行为与群体交易行为协调在一个统一的框架体系。)
  • 详情 Behavioral Model For Contrarian Effect In China
    Based on prospect theory and individual investors’ biases such as representativeness heuristic and conservatism, we establish a behavioral model to explain the contrarian effect in China’s financial market. We find that contrarian effect is mainly attributed to trend chasing instead of disposition effect. Our model also suggests that small-cap stocks show stronger contrarian effect, phenomena confirmed by empirical research.