Prospect theory and the investor's attitudes toward risk

Article type: Research Article

Authors: Chuang, Shuang-Shii | Chang, Min-Chang^;

Affiliations: Department of Business Administration School of Management, National Cheng Kung University, Tainan, Taiwan, ROC

Note: [] Address for correspondence: Min-Chang Chang, Department of Business Administration School of Management, National Cheng Kung University, Tainan, Taiwan, ROC. Tel.: +886 6 2533131, ext. 5326; Fax: +886 6 2080179; E-mail: [email protected]

Abstract: This paper investigates the investor's attitudes toward risk. It suggests that the investor's risk attitude should be a mixture of risk aversion and risk seeking, which would be consistent with the prospect theory proposed by Kahneman and Tversky [American Psychologist 39(4) (1984), 341–350]. Two experimental studies proved this proposal. As expected, the results of both studies showed that risk-averse attitudes in the domain of gains (positive risk-return relationship) and risk-seeking attitudes in the domain of losses (negative risk-return relationship), which strongly supported the prospect theory.

Keywords: Prospect theory, risk attitude, perceived risk, perceived return

DOI: 10.3233/RDA-130096

Journal: Risk and Decision Analysis, vol. 4, no. 4, pp. 303-308, 2013