Prospect Theory

Question 1

Dyl (1977)

Answer 1

Disposition effect, avoiding CGT lock in tax motivated selling

Question 2

Kahneman, Knetsch & Thaler (1990)

Answer 2

Testing the endowment effect, mug experiment vs. tokens : WTP << WTA. Long term explained via sentimental attachment but short term instantaneous endowment illustrates more concretely the S shaped value function. Also finds support for “concession aversion” - not wanting to admit defeat on any part of a deal

Question 3

Cook and Clotfelter (1993); Terrell (1994)

Answer 3

Evidence for the over-weighting of the possibility effect; lottery sales correlated with the rollover size and population

Question 4

Mehra & Prescott (1985)

Answer 4

Excessive risk aversion needed to explain 8% equity premium. 50:50 of $50,000 or $100,000 equivalent to $51, 329

Question 5

Bertrand, Mullainathan & Shafir (2004)

Answer 5

Redesign policy for the poor, more transparent pricing and default options Money isn’t fungible Nudges, even a map can encourage savings account opening

Question 6

Camerer, Babcock, Loewenstein and Thaler (1997)

Answer 6

Cab drivers set daily loose $ targets, they do not exhibit evidence of inter-temporal substitution across days. However, these daily targets are looser with more experienced drivers

Question 7

Coursey, Houis & Shulze (1987)

Answer 7

WTA and WTP converge with learning

Question 8

Odean (1998)

Answer 8

Testing the disposition effect, PGR>PLR trading isn’t due to portfolio rebalancing

Question 9

Shefrin & Statman (1985)

Answer 9

Holding losers and selling winners, not due to taxation

Question 10

Bremer & Kiyoshi (1996)

Answer 10

“Window dressing” in Japan for explaining disposition effect, favourable accounts and headline figures for the financial year close

Question 11

Kahneman & Tversky (1979)

Answer 11

S shaped value function, non-linear weighting function - “Possibility” and “Certainty” effects Prospect theory has two phases: Editing and evaluating phases of the decision process

Question 12

Thaler (1999)

Answer 12

3 Components of Mental Accounting: i. Perception ii. Segregation iii. Re-evaluation

Question 13

Bernartzi & Thaler (1995)

Answer 13

Myopic Loss Aversion = LA + Frequent Re-evaluation - severe Risk aversion to negative returns

Question 14

Kahneman and Tversky (1981)

Answer 14

Framing effects, “Asian Disease Problem” of saving or ending lives with certainty or medium probabilities

Question 15

Reversed:

Disposition effect, avoiding CGT lock in tax motivated selling

Answer 15

Dyl (1977)

Question 16

Reversed:

Testing the endowment effect, mug experiment vs. tokens : WTP << WTA. Long term explained via sentimental attachment but short term instantaneous endowment illustrates more concretely the S shaped value function. Also finds support for “concession aversion” - not wanting to admit defeat on any part of a deal

Answer 16

Kahneman, Knetsch & Thaler (1990)

Question 17

Reversed:

Evidence for the over-weighting of the possibility effect; lottery sales correlated with the rollover size and population

Answer 17

Cook and Clotfelter (1993); Terrell (1994)

Question 18

Reversed:

Excessive risk aversion needed to explain 8% equity premium. 50:50 of $50,000 or $100,000 equivalent to $51, 329

Answer 18

Mehra & Prescott (1985)

Question 19

Reversed:

Redesign policy for the poor, more transparent pricing and default options Money isn’t fungible Nudges, even a map can encourage savings account opening

Answer 19

Bertrand, Mullainathan & Shafir (2004)

Question 20

Reversed:

Cab drivers set daily loose $ targets, they do not exhibit evidence of inter-temporal substitution across days. However, these daily targets are looser with more experienced drivers

Answer 20

Camerer, Babcock, Loewenstein and Thaler (1997)

Question 21

Reversed:

WTA and WTP converge with learning

Answer 21

Coursey, Houis & Shulze (1987)

Question 22

Reversed:

Testing the disposition effect, PGR>PLR trading isn’t due to portfolio rebalancing

Answer 22

Odean (1998)

Question 23

Reversed:

Holding losers and selling winners, not due to taxation

Answer 23

Shefrin & Statman (1985)

Question 24

Reversed:

“Window dressing” in Japan for explaining disposition effect, favourable accounts and headline figures for the financial year close

Answer 24

Bremer & Kiyoshi (1996)

Question 25

Reversed:

S shaped value function, non-linear weighting function - “Possibility” and “Certainty” effects Prospect theory has two phases: Editing and evaluating phases of the decision process

Answer 25

Kahneman & Tversky (1979)

Question 26

Reversed:

3 Components of Mental Accounting: i. Perception ii. Segregation iii. Re-evaluation

Answer 26

Thaler (1999)

Question 27

Reversed:

Myopic Loss Aversion = LA + Frequent Re-evaluation - severe Risk aversion to negative returns

Answer 27

Bernartzi & Thaler (1995)

Question 28

Reversed:

Framing effects, “Asian Disease Problem” of saving or ending lives with certainty or medium probabilities

Answer 28

Kahneman and Tversky (1981)