Prospect theory and fat tails

Issue title: Modeling Rare and Uncommon Risks

Article type: Research Article

Authors: Maymin, Philip

Affiliations: Polytechnic Institute of New York University, New York, NY, USA. E-mail: [email protected]

Abstract: A behavioral representative investor who evaluates a single risky asset based on cumulative prospect theory will often induce high kurtosis, negative skewness, and persistent autocorrelation into the distribution of market returns even if the asset payoffs are merely a sequence of independent coin tosses. These findings continue to hold even when the investor is simply loss averse.

Keywords: Loss aversion, kurtosis, prospect theory, fat tails, behavioral

DOI: 10.3233/RDA-2009-0016

Journal: Risk and Decision Analysis, vol. 1, no. 3, pp. 187-195, 2009