PHYSICS 102 Lecture 19:
Document Summary
Prospect theory in the wild: evidence from the field. Ten regularities in naturally occurring data that are anomalies for expected utility. Can all be explained by three simple elements of prospect theory: Loss-aversion: reflection effects, nonlinear weighting of probability. People isolate decisions (or edit them) from others they might be grouped with. Stocks (or equities) tend to have more variable annual price changes (or returns ) than bonds do average return to stocks is higher, as a way of compensating investors for the additional risk they bear. Researchers looked into how large a degree of risk-aversion is implied by a premium of e. g. 8% Investors must be absurdly risk averse to demand such a high premium. Furthermore, strong house money effect (an increase in risk-preference after stocks have risen) is necessary to explain the equity premium. If you think the stock will rise: keep it.
