Reference dependence, loss aversion, and risk seeking for losses together comprise the preference-based component of prospect theory that sets its value function apart from the standard risk-aversion model. Using an elasticity analysis, we show that this distinctive preference component serves...

Reference dependence, loss aversion, and risk seeking for losses together comprise the preference-based component of prospect theory that sets its value function apart from the standard risk-aversion model. Using an elasticity analysis, we show that this distinctive preference component serves...

We formulate and study a general multi-period behavioral portfolio selection model under Kahneman and Tversky's prospect theory, featuring an incomplete market and an S-shaped utility function. We first discuss the ill-posedness issue under a multi-period framework and identify the conditions...

We examine how the evidence of mean-reversion in stock returns affects dynamic trading behavior for investors with prospect-theory preferences. Particular attention is paid to the trading incentives created by the interaction between prospect-theory preferences and mean-reverting return...

We develop a formal model to investigate the implications of bounded rationality for the origin and structure of loss aversion and optimism in marketplaces. Based on Simon's original description, we explicitly model bounded rationality as a decision mechanism that captures incomplete...