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Stock market decision-making in the light of prospect theory

Author

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  • Lakatos, Artur Lóránd
  • Botos, Ákos

Abstract

One of the main insights of prospect theory is that investment decisions are often irrational, following certain trends, and this is particularly true for individual investment decisions. The theory’s main proponents and its developers have described the phenomenon of risk seeking over losses and risk aversion over gains, mainly by looking at stock market trends. One of the hypotheses of our paper is that investors become risk averse in times of crisis. The other hypothesis is that the hummingbird effect can be detected in stock market trading. Using linear regression, we have been able to show that investors become more risk averse in times of crisis, which can also be seen in stock market trading, through the shift in the index. In addition, we have also been able to show that the hummingbird effect can also be detected in stock market trading.

Suggested Citation

  • Lakatos, Artur Lóránd & Botos, Ákos, 2024. "Stock market decision-making in the light of prospect theory," Public Finance Quarterly, Corvinus University of Budapest, vol. 70(2), pages 63-89.
    • Handle: RePEc:pfq:journl:v:70:y:2024:i:2:p:63-89
    DOI: https://doi.org/10.35551/PFQ_2024_2_3
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    More about this item

    Keywords

    stock market indices; butterfly-effect; financial crisis; correlation and regression; prospect theory; crisis theory;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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