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Specific Applications of Prospect Theory to Behavioral Finance

In: Finance and the Behavioral Prospect

Author

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  • James Ming Chen

    (Michigan State University)

Abstract

Prospect theory illuminates multiple problems in behavioral finance. In economics generally and in finance in particular, the real challenge lies in “know[ing] exactly how to apply” prospect theory’s “many remarkable insights.”1 “Whatever its limitations, prospect theory represents a valuable refinement to the maximization assumption” of rational choice and expected utility theory, and accordingly “should inform … policymaking.”2

Suggested Citation

  • James Ming Chen, 2016. "Specific Applications of Prospect Theory to Behavioral Finance," Quantitative Perspectives on Behavioral Economics and Finance, in: Finance and the Behavioral Prospect, chapter 0, pages 213-246, Palgrave Macmillan.
    • Handle: RePEc:pal:qpochp:978-3-319-32711-2_9
    DOI: 10.1007/978-3-319-32711-2_9
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    Cited by:

    1. Drechsler, Martin, 2023. "Ising models to study effects of risk aversion in socially interacting individuals," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 632(P1).

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