Can prospect theory explain risk-seeking behavior by terminally ill patients?

Patients with life-threatening conditions sometimes appear to make risky treatment decisions as their condition declines, contradicting the risk-averse behavior predicted by expected utility theory. Prospect theory accommodates such decisions by describing how individuals evaluate outcomes relative to a reference point and how they exhibit risk-seeking behavior over losses relative to that point. The authors show that a patient's reference point for his or her health is a key factor in determining which treatment option the patient selects, and they examine under what circumstances the more risky option is selected. The authors argue that patients' reference points may take time to adjust following a change in diagnosis, with implications for predicting under what circumstances a patient may select experimental or conventional therapies or select no treatment.

Testing prospect theory in students��� performance

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Corporate strategic responses to foreign entry: insights from prospect theory

Purpose ��� The purpose of this paper is to address how firms adapt their product and geographic diversification as a response to foreign rivals penetrating their domestic market by adopting a behavioral perspective to understand firm-level strategic responses to foreign entry. Design/methodology/approach ��� The study proposes that strategic responses to foreign entry selected by domestic incumbents have both a framing component and a related, strategic choice component, with the latter including changes in product and geographic market diversification (though other more business strategy-related responses are also possible, e.g. in product pricing and marketing). This study tests a set of hypotheses building on panel data of large US firms. Findings ��� The study finds, in accordance with our predictions, that domestic incumbents reduce their product and geographic diversification when facing an increase in import penetration. However, when increased market penetration by foreign firms takes the form of FDI rather than imports, the corporate response appears to be an increase in product and geographic diversification, again in line with our predictions. Originality/value ��� The study develops a new conceptual framework that is grounded in prospect theory, but builds on recent insights from mainstream international strategic management studies (Bowen and Wiersema, 2005; Wiersema and Bowen, 2008).

Prospect theory, diversifica����o ing��nua e propens��o a risco de especialistas em mercado: evid��ncia emp��rica no Brasil

The Prospect Theory is one of the basis of Behavioral Finance and models the investor behavior in a different way than von Neumann and Morgenstern Utility Theory. Behavioral characteristics are evaluated for different control groups, validating the violation of Utility Theory Axioms. Na��ve Diversification is also verified, utilizing the 1/n heuristic strategy for investment funds allocations. This strategy causes different fixed and equity allocations, compared to the desirable exposure, given the exposure of the subsample that answered a non constrained allocation question. When compared to non specialists, specialists in finance are less risk averse and allocate more of their wealth on equity.

A fuzzy risk attitude classification based on prospect theory

Traditional methods do not actually measure peoples��� risk attitude naturally and precisely. Therefore, a fuzzy risk attitude classification method is developed. Since the prospect theory is usually considered as an effective model of decision making, the personalized parameters in prospect theory are firstly fuzzified to distinguish people with different risk attitudes, and then a fuzzy classification database schema is applied to calculate the exact value of risk value attitude and risk be- havior attitude. Finally, by applying a two-hierarchical clas- sification model, the precise value of synthetical risk attitude can be acquired.

Applying prospect theory to predict new venture creation

Although prior research on new venture creation has identified several antecedents that differentiate entrepreneurs from non-entrepreneurs, scholars still have an incomplete understanding of the factors and decision processes that lead an individual to become an entrepreneur. By applying prospect theory, we introduce the reference point as an important antecedent of new venture creation. Testing our research model and hypotheses with entrepreneurs and employees, results show that entrepreneurs set more aspiring reference points and therefore find themselves more often in a perceived loss situation. Results are also robust when testing for entrepreneurial intention of business graduate students. According to prospect theory, the perceived loss triggers more risk-seeking behavior. Summing up, the reference point has a positive effect on new venture creation and differentiates entrepreneurs from nonentrepreneurs. We discuss theoretical and managerial implications of the findings and develop avenues for future research.

Testing prospect theory in students��� performance

This paper tests the existence of ���reference dependence��� and ���loss aversion��� in students��� academic performance. Accordingly, achieving a worse than expected academic performance would have a much stronger effect on students��� (dis)satisfaction than obtaining a better than expected grade. Although loss aversion is a well-established finding, some authors have demonstrated that it can be moderated ��� diminished, to be precise���. Within this line of research, we also examine whether the students��� emotional response (satisfaction/dissatisfaction) to their performance can be moderated by different musical stimuli. We design an experiment through which we test loss aversion in students��� performance with three conditions: ���classical music���, ���heavy music��� and ���no music���. The empirical application supports the reference-dependence and loss aversion hypotheses (significant at p < 0.05), and the musical stimuli do have an influence on the students��� state of satisfaction with the grades (at p < 0.05). Analyzing students��� perceptions is vital to find the way they process information. Particularly, knowing the elements that can favour not only the academic performance of students but also their attitude towards certain results is fundamental. This study demonstrates that musical stimuli can modify the perceptions of a certain academic result: the effects of ���positive��� and ���negative��� surprises are higher or lower, not only in function of the size of these surprises, but also according to the musical stimulus received.

Research on the influence of behavioral forces that motivate trader behavior and sentiment: A prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. ^ The connection between consumers' sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders "satisfice" rather than choose the "best" alternative. A trader's degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. ^ Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. ^ The dissertation emphasizes the need for specifying precise, testable models of investors' expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit "irrational" market behavior. ^

Research on the influence of behavioral forces that motivate trader behavior and sentiment- a prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. The connection between consumers' sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders "satisfice" rather than choose the "best" alternative. A trader's degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. The dissertation emphasizes the need for specifying precise, testable models of investors' expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit "irrational" market behavior.

Prospect theory and the effects of bankruptcy laws on entrepreneurial aspirations

We apply prospect theory to explain how personal and corporate bankruptcy laws affect risk perceptions of entrepreneurs at time of entry and therefore their growth ambitions. Previous theories have reached ambiguous conclusions as to whether countries with more debtor-friendly bankruptcy laws (i.e. laws that are more forgiving towards debtors in bankruptcy proceedings) are likely to have more entrepreneurs, or whether, creditorfriendly regimes have positive effects on new ventures via enhanced incentives for the supply of credit to entrepreneurs. Responding to this ambiguity, we apply prospect theory to propose that entrepreneurs do not attach the same significance to different elements of bankruptcy codes���and to explain which aspects of debtor-friendly bankruptcy laws matter more to entrepreneurs. Based on this, we derive and confirm hypotheses about the impact of aspects of bankruptcy codes on entrepreneurial activity using the Global Entrepreneurship Monitor combined with data on both personal and corporate bankruptcyregulations for 15 developed OECD countries. We use multilevel random coefficient logistic regressions to take account of the hierarchical nature of the data (country and individual levels). Because entrepreneurs and creditors are sensitive to different elements of the codes, there is scope for optimisation of the legal design of bankruptcy law to achieve both an adequate supply of credit and to encourage high-ambition entrepreneurship.

On the Qualitative Comparison of Decisions Having Positive and Negative Features

Making a decision is often a matter of listing and comparing positive and negative arguments. In such cases, the evaluation scale for decisions should be considered bipolar, that is, negative and positive values should be explicitly distinguished. That is what is done, for example, in Cumulative Prospect Theory. However, contrary to the latter framework that presupposes genuine numerical assessments, human agents often decide on the basis of an ordinal ranking of the pros and the cons, and by focusing on the most salient arguments. In other terms, the decision process is qualitative as well as bipolar. In this article, based on a bipolar extension of possibility theory, we define and axiomatically characterize several decision rules tailored for the joint handling of positive and negative arguments in an ordinal setting. The simplest rules can be viewed as extensions of the maximin and maximax criteria to the bipolar case, and consequently suffer from poor decisive power. More decisive rules that refine the former are also proposed. These refinements agree both with principles of efficiency and with the spirit of order-of-magnitude reasoning, that prevails in qualitative decision theory. The most refined decision rule uses leximin rankings of the pros and the cons, and the ideas of counting arguments of equal strength and cancelling pros by cons. It is shown to come down to a special case of Cumulative Prospect Theory, and to subsume the ���Take the Best��� heuristic studied by cognitive psychologists.

When opportunity matters: Comparing the risk taking attitudes of prisoners and recently released ex-prisoners

Risk-taking tendencies and environmental opportunities to commit crime are two key features in understanding criminal behavior. Upon release from prison, ex-prisoners have a much greater opportunity to engage in risky activity and to commit criminal acts. We hypothesized that ex-prisoners would exhibit greater risk-taking tendencies compared to prisoners who have fewer opportunities to engage in risky activity and who are monitored constantly by prison authorities. Using cumulative prospect theory to compare the risky choices of prisoners and ex-prisoners our study revealed that ex-prisoners who were within 16 weeks of their prison release made riskier choices than prisoners. Our data indicate that previous studies comparing prisoners behind bars with nonoffenders may have underestimated the risk-taking tendencies of offenders. The present findings emphasize the central role played by risk-taking attitudes in criminal offending and highlight a need to examine offenders after release from prison.

Attitudes towards risk in financial decision making

Doutoramento em Gest��o

Asymmetries in Business Cycles

Esta disertaci��n busca estudiar los mecanismos de transmisi��n que vinculan el comportamiento de agentes y firmas con las asimetr��as presentes en los ciclos econ��micos. Para lograr esto, se construyeron tres modelos DSGE. El en primer cap��tulo, el supuesto de funci��n cuadr��tica sim��trica de ajuste de la inversi��n fue removido, y el modelo can��nico RBC fue reformulado suponiendo que des-invertir es m��s costoso que invertir una unidad de capital f��sico. En el segundo cap��tulo, la contribuci��n m��s importante de esta disertaci��n es presentada: la construcci��n de una funci��n de utilidad general que anida aversi��n a la p��rdida, aversi��n al riesgo y formaci��n de h��bitos, por medio de una funci��n de transici��n suave. La raz��n para hacerlo as�� es el hecho de que los individuos son aversos a la p��rdidad en recesiones, y son aversos al riesgo en auges. En el tercer cap��tulo, las asimetr��as en los ciclos econ��micos son analizadas junto con ajuste asim��trico en precios y salarios en un contexto neokeynesiano, con el fin de encontrar una explicaci��n te��rica de la bien documentada asimetr��a presente en la Curva de Phillips.