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Prospect theory and narrow framing bias: Evidence from emerging markets

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  • do Nascimento Junior, Arnaldo João
  • Klotzle, Marcelo Cabus
  • Brandão, Luiz Eduardo T.
  • Pinto, Antonio Carlos Figueiredo

Abstract

Using prospect theory, we analyzed the narrow framing bias in investment decisions in certain emerging countries: Brazil, China, Russia, Mexico and South Africa. In all cases, we empirically identified the predictive power of prospect theory for stock returns. We also found that the probability weighting function is the most important factor in this predictive power. The relationship between prospect theory and stock returns is different in each country and may be influenced by factors associated with cultural aspects.

Suggested Citation

  • do Nascimento Junior, Arnaldo João & Klotzle, Marcelo Cabus & Brandão, Luiz Eduardo T. & Pinto, Antonio Carlos Figueiredo, 2021. "Prospect theory and narrow framing bias: Evidence from emerging markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 90-101.
    • Handle: RePEc:eee:quaeco:v:80:y:2021:i:c:p:90-101
    DOI: 10.1016/j.qref.2021.01.016
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    More about this item

    Keywords

    Prospect theory; Narrow framing bias; Probability weighting function; Emerging markets; Stock returns;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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