PROSPECT THEORY

Developed by Kahneman and Tversky in 1979

Shows how people manage risk and uncertainty
Most central element of prospect theory is S-shaped value

function
Value

Los Gain
s
LOSS AVERSION THEORY
People weigh all potential gains and losses in relation to
some benchmark reference point
Depicts tendency of people to show greater sensitivity to

losses than gains

Types

1. Loss on the basis of valence or desirability

2. Loss on the basis of changes in possession
MENTAL ACCOUNTING
Peoples tendency to code, categorise and evaluate
economic outcomes
Primary reason is to enhance our understanding of the

psychology of choice
3 components

1. Perception of outcomes and the making and evaluation of

decisions
2. Assignment of activities to specific accounts
3. Determination of time periods to which different mental
accounts relates
INVESTORS DISPOSITION EFFECT
Disposition effect: notion of framing to the realization of
losses
Refer to asymmetric risk aversion, according to which

investors are risk-averse when faced with gains and risk-

seeking when faced with losses
PSYCHOLOGY OF FINANCIAL
MARKETS
Offers an understanding of financial market process which
goes beyond cognitive aspects alone
Provides insights into the connection between the

subjective experience of market participants and objective

market processes
Offers insight into the difference between market

participants
PSYCHOLOGY OF INVESTOR
BEHAVIOR
Incorporates both quantitative and qualitative aspect
Examines the mental processes and emotional issues
Different biases

1. Familiarity bias
2. Self-attribution bias
3. Trend-chasing bias
4. Behavorial bias
THANK YOU!!!