Do financial professionals behave according to prospect theory? An experimental study
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Prospect theory is increasingly used to explain deviations from the traditional paradigm of rational agents. Empirical support for prospect theory comes mainly from laboratory experiments using student samples. It is obviously important to know whether and to what extent this support generalizes to more naturally occurring circumstances. This article explores this question and measures prospect theory for a sample of private bankers and fund managers. We obtained clear support for prospect theory. Our financial professionals behaved according to prospect theory and violated expected utility maximization. They were risk averse for gains and risk seeking for losses and their utility was concave for gains and (slightly) convex for losses. They were also averse to losses, but less so than commonly observed in laboratory studies and assumed in behavioral finance. A substantial minority focused on gains and largely ignored losses, behavior reminiscent of what caused the current financial crisis.
KeywordsProspect theory Loss aversion Field data Behavioral finance Experimental economics
JEL ClassificationD81 G11
Mohammed Abdellaoui’s research was supported by a grant from Agence Nationale de la Recherche (Risk Attitude Project), France. Han Bleichrodt’s research was made possible by a grant from the Netherlands Organization for Scientific Research (NWO). Nick Barberis, Jan Boone, Olivier l’Haridon, Tobias Klein, Charles Noussair, Jan Potters, Martijn van den Assem, and Peter Wakker gave helpful comments.
This article is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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