The sunk-cost fallacy (SCF) occurs when an individual makes an investment with a low probability of a payoff because an earlier investment has already been made. It is considered an error because a rational decision should not factor in now-irretrievable investments, as they do not affect current outcome likelihoods. Previous research has measured the tendency to commit the SCF by using hypothetical scenarios in which participants must choose to make a future investment or not after making an initial investment. There are many theories as to why people commit the SCF. Loss aversion, which is the preference for uncertain over certain losses, may be related to the SCF. Dual-process theory, which views decision-making in terms of a fast, automatic process called system 1 and a slow, deliberate process called system 2, may also help to explain the SCF. In Experiment 1, participants were asked to complete a sunk-cost questionnaire in which the initial-investment types and amounts varied. They also completed an endowment-effect task as a measure of loss aversion. The SCF was committed most often when the initial investment was large compared to small and most often with money, less with time, and least with effort. There was an interaction effect in which small differences were seen in the SCF between time, effort, and money when the initial investment was small, and differences grew larger as the initial investment increased. Loss aversion displayed a non-significant negative relation with the SCF. In Experiment 2, participants completed a sunk-cost questionnaire in which they were asked to respond as they normally would and then from the perspective of a fictional person described as a logical decision maker. In cases in which they committed the SCF, they were asked to indicate why they continued to invest. They also completed a risky-lottery loss-aversion task. As seen in Experiment 1, the SCF was more likely when initial investments were greater and occurred most when the initial investment was money, less when it was time, and least when it was effort. Loss aversion had a significant but small negative relation with SCF scores. There was no effect of perspective taking. It may be that the SCF is simply due to the over-application of the personal rule “don't waste”, as not wanting to be wasteful was the most-common reason participants gave for why they committed the SCF.

Why Do Borrowers Choose Arms Over FRMS? : A Behavioral Investigation in the U.S. and Japan by Masaki Mori In the U.S., a considerable number of borrowers still choose adjustable rate mortgages (ARMs) over fixed rate mortgages (FRMs), even with historically low interest rates. During 2004-2005, when interest rates remained at 30-year lows, ARMs accounted for approximately one-third of all mortgage originations. Kahneman and Tversky's Prospect Theory’s reflection hypothesis suggested that people tend to be more risk-averse in positive decision situations, while they tend to be more risk-seeking when making negative choices. The first purpose of this study is to examine descriptive reasons for the popularity of ARMs in the U.S. People of different cultures often evaluate uncertain events in different ways. Hofstede developed a cultural dimension, uncertainty avoidance (UA), where UA is defined as the extent to which people feel threatened by uncertain situations. The second purpose of this study is to test the role of UA on the choice of mortgage products using data from two cultures (U.S. and Japan), potentially differing in attitude toward uncertain situations. Controlled experiments were conducted using 92 U.S. participants and 49 Japanese participants. Results of analysis supported Prospect Theory’s reflection hypothesis, suggesting that risk-averse people tend to become more risk-seeking when choosing a mortgage type, leaning more toward ARMs when people frame the mortgage choice problem as part of a loss situation. The results of the intercultural comparison portion of the study supported the research hypothesis that UA works as a moderating variable for Prospect Theory’s reflection hypothesis, suggesting that risk-averse people with lower UA scores more dramatically change from a risk-averse preference for a fixed-rate bond to a more risk-seeking preference for an adjustable-rate mortgage, than risk-averse people with higher UA scores do. Overall, results of this study suggested that borrowers behave differently depending on their propensity for current consumption, the level of UA, and how they frame the mortgage choice decision. This study contributes to existing mortgage choice literature by incorporating psychological and cultural traits to examine borrowers’ attitudes towards interest rate risk with regard to residential mortgages. The findings are of great importance globally for governments and lenders in creating and introducing new mortgage products in countries with diverse cultures.

Hedonic Editing is a theory of behavioral finance based on prospect theory, attempting to predict whether individuals would segregate or integrate multiple outcomes to achieve to highest perceived value. We test the theory by an actual market data in Taiwan Futures Exchange. If the hypothesis holds, we should observe that investors would integrate losses more frequently than gains and integrate smaller losses with larger gains rather than the other way around. However, results do not support the hypotheses totally. We further test the theory by different trader types. Results show that domestic individuals exhibit the strongest biases of hedonic editing, followed by domestic corporations, and foreign institutions.

[pt] O desenvolvimento do campo de pesquisa em Finanças Comportamentais nos mostrou que por diversas vezes violamos postulados de racionalidade estrita utilizados pela Teoria da Utilidade Esperada e demais ferramentais ortodoxos de análise de decisões sob incerteza. Neste contexto, este trabalho utilizou como estrutura analítica alternativa as formas funcionais derivadas da Teoria do Prospecto e, tendo em vista esse modelo, foi replicado um experimento consolidado na literatura em uma amostra composta de alunos da Pontifícia Universidade Católica do Rio de Janeiro (PUC-Rio), sendo o objetivo estimar por máxima verossimilhança os parâmetros de risco e preferências temporais dos respondentes. Os resultados encontrados foram coerentes com outras evidências presentes na literatura, cabendo ressaltar que, para estes respondentes e talvez por sua formação, a modelo tradicional de desconto contínuo se mostrou uma aproximação melhor do que o previsto. / [en] The development of Behavioral Finance literature has shown us that for several times we violate the postulates of strict rationality assumed by the Theory of Expected Utility and other orthodox tools of decision analysis under uncertainty. In this context, this paper adopts the Prospect Theory as its analytical framework and, with this model, an experiment present in the literature of this field was conducted with a sample of students from the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) which the purpose was to simultaneously estimate their risk and time preferences by applying a maximum likelihood approach. The results obtained were consistent with other present in the literature, and it should be pointed out that, for these respondents and perhaps because of their background, the orthodox continuous discount model proved to have a better fit than expected.

Coordenação de Aperfeiçoamento de Pessoal de Nível Superior / Na busca por entender de que forma profissionais de contabilidade estão analisando e repassando informações, o objetivo geral do trabalho é mostrar o processo de decisão em ambiente contábil sob a ótica da Teoria dos Prospectos, buscando demostrar que as decisões, são baseadas principalmente em julgamentos, contribuindo para consciência das imperfeições dos julgamentos e decisões. O objetivo específico é testar de que forma os efeitos Framing, e Certeza podem moldar uma tomada de decisão dentro do ambiente contábil. Sendo uma pesquisa descritiva, aplicou-se questionário estruturado e não disfarçado à profissionais da área de Contabilidade. O questionário foi dividido em dois tipos (I e II), dividindo assim o campo dos ganhos e das perdas. Procurou-se através da análise do resultado dos questionários evidenciar o impactos dos efeitos nesses profissionais. Dentre o resultado, pode-se constatar que de maneira geral as questões que envolvem certeza no campo dos ganhos são as mais procuradas entre os respondentes. É possível identificar a presença do Efeito Framing. Em relação ao gênero, é possível identificar maior impacto do Efeito Framing nos homens que nas mulheres. Os Efeitos Certeza e Pseudocerteza se fazem presentes em ambos os gêneros o que demostra certa cautela frente a tomada de decisão. Através desse estudo buscou-se auxiliar os decisores na tarefa de repensar seus atuais processos de tomada de decisão, por meio da conscientização de que são dotados de uma racionalidade limitada e que seus julgamentos são passivos de desvios. / In seeking to understand how accounting professionals are analyzing and transmitting information, the aim of this work is to show the decision-making in accounting environment from the perspective of Prospect Theory, seeking to demonstrate that decisions are based primarily on judgments, contributing to awareness of the imperfections of the judgments and decisions. The specific objective is to test how the effects Framing, and Certainty can shape decision-making within the accounting environment. As a descriptive study, we applied a structured questionnaire and did not disguise the accounting professionals. The questionnaire was divided into two types (I, II), thus dividing the field of gains and losses. Was sought by examining the results of the questionnaires show the impact of these effects professionals. Among the results, one can see that in general the issues involved in the field of sure gains are the most sought after among the respondents. You can identify the presence of Framing Effects. Regarding gender, it is possible to identify the greatest impact Framing Effect in men than in women. The Effect Certainty are present in both sexes which demonstrates caution before making a decision. Through this study we sought to assist decision makers in the task of rethinking their current decision-making processes, through the awareness that they are endowed with a bounded rationality and that their judgments are passive deflections.

[pt] Este trabalho analisou o desempenho de 31 fundos mútuos comportamentais atuantes nos EUA, Europa e Japão descritos em Santoni e Kelshiker (2010). Foram observados os desempenhos dos fundos e seus respectivos Benchmarks em quatro indicadores: Índice de Sharpe, Índice de Sortino, Medida Ômega e Medida de Desempenho Comportamental. O horizonte da análise foi de 10 anos (jan/04 a dez/14) dividido em intervalos de 6, 12, 36, 60 e 120 meses. A partir da consolidação dos indicadores os fundos foram ranqueados e classificados em três faixas de desempenho: superior, intermediário e inferior. No intervalo de 120 meses não houve, na média geral, diferença de desempenho significativa (a 5 por cento) entre os fundos e os Benchmarks. A análise por intervalos indicou que o desempenho dos fundos em relação aos Benchmarks piora conforme aumenta o prazo de aplicação. Nos intervalos mais curtos (6 e 12 meses) não houve, na média, diferença de desempenho significativa enquanto nos prazos mais longos (36 e 60 meses) o desempenho médio dos fundos foi significativamente inferior aos Benchmarks. Na média de todos os intervalos o desempenho médio dos fundos foi significativamente inferior aos Benchmarks. Dentre os indicadores utilizados, o índice de Sortino foi o que apresentou maior correlação com o desempenho geral dos fundos. / [en] This work has analyzed the performance of 31 behavioral mutual funds operating in USA, Europe and Japan, as described in Santoni and Kelshiker (2010). It has been observed the performance of the funds and their respective Benchmarks according to four measures: Sharpe Index, Sortino Index, Omega Measure and Behavioral Performance Measure. The analysis covered a 10-year period (jan-04 to dec-14) split into intervals of 6, 12, 36, 60 and 120 months. Based on the consolidation of the performance measures, the funds have been ranked and classified into three performance categories: upper, intermediate and lower. In the 120-month interval there has not been, on average, a significant difference (at 5 per cent) in performance between funds and Benchmarks. The analysis by intervals showed that the funds performance worsens in relation to the Benchmarks as the investment period increases. In shorter intervals (6 and 12 months) there has not been, on average, a significant difference in performance while in the longer intervals (36 and 60 months) the funds average performance was significantly lower than the Benchmarks. Computing the mean of all intervals, the funds average performance was significantly lower than the Benchmarks. Among the performance measures used, the Sortino Index presented the highest correlation with the general performance of the funds.

This thesis investigates the choices under risk in the framework of non-expected utility theories. One of the key contributions of this thesis is providing an approach that allows for a complete characterisation of Cumulative Prospect Theory (CPT) preferences without prior knowledge of the reference point. The location of the reference point that separates gains from losses is derived endogenously, thus, without any additional assumptions on the decision maker’s risk behaviour. This is different to the convention used in the literature, according to which, the reference point is preselected. The problem arising from imposing the location of the reference point is that the underlying preference conditions might not be alligned with the predictions made by the model. Consequently, it is difficult to verify such a model or to test it empirically. The present contribution offers a set of normatively and descriptively appealing preference conditions, which enable the elicitation of the reference point from the decision maker’s behaviour. Since these conditions are derived using objective probabilities, they can also be applied to settings such as health or insurance, where the continuity of the utility function is not required. As a result, the obtained representation theorem is not only the most general foundation for CPT currently available, but it also provides further support for the use of CPT as a modelling tool in decision theory and fi…nance. Another contribution that this thesis can be credited with is an application of rank-dependent utility theory (RDU) to the problem of insurance demand in the monopoly market affected by adverse selection. The present approach extends the classical model of Stiglitz (1977) by accounting for an additional component of heterogeneity among consumers, the heterogeneity in risk perception. Speci…fically, consumers employ distinctive probability weighting functions to assess the likelihood of risky events. This aspect of consumers’' behaviour highlights the importance that the probabilistic risk attitudes within the RDU framework, such as optimism and pessimism, have for the choice of insurance contract. The analysis yields a separating equilibrium, with full insurance for a sufficiently pessimistic decision maker. An important implication of this result is that any low-risk individual who sufficiently overestimates his probability of loss will induce the uninformed insurer to o¤er him full coverage, thereby, affecting the high-risk type adversely. This outcome is consistent with the recent empirical puzzle regarding the correlation between ex-post risk and insurance coverage, according to which, agents with low exposure to risk receive a larger amount of compensation. By providing an explanation of this pattern of individual behaviour, the current work demonstrates that theory and practice of insurance demand can be reconciled to a greater extent. The paper also provides a behavioural rationale for policy intervention in the market with RDU agents, where the initial distortions in contracts due to unobservable risks are aggravated by the non-linear weighting of probability of a risky event.

This thesis aplied tools of economic analysis on situation in poker, where players choose to finish tournament or make a deal and take certain amount of money immediately. Theoretical frame consists of economic theories for decesion under risk and poker literature. Hypotheses are tested with regresion analysis on dataset which I obtain by my own observing. Estimations support hypothesis that players are risk-averze and loss-averze. In bigger tournaments are bigger prizepools and that is the reason, why players in bigger tournament make deals more often. Moreover deal is more likely, when players are approximetly equal skilled in poker.

Titre: Categorisation et évaluation de l'innovation :approche par la théorie des prospects appliquée au cas du vin allégé en alcool.Chaque année de très nombreuses innovations sont proposées sur le marché, mais seul un nombre réduit d'entre elles rencontre le succès espéré. Face à ce constat, l'une des explications avancées par la recherche marketing est la difficulté du consommateur à catégoriser un nouveau produit.Ce travail s'insère dans le courant de recherches sur la catégorisation de l'innovation et suggère de tenir compte de l'incertitude qui caractérise ce processus. L'originalité de cette étude est de proposer un lien entre les recherches sur la catégorisation de l'innovation et celles sur la prise de décision en condition d'incertitude. La Théorie des Prospects (Kahneman et Tversky, 1979) en particulier, et l'un de ses principes, celui d'aversion aux pertes, ont fourni un cadre théorique adapté pour tenir compte du caractère d'incertitude de l'innovation. Notre question de recherche a proposé de vérifier si le principe d'aversion aux pertes pouvait s'appliquer pour expliquer comment la modification de certains attributs d'une catégorie provoque la perception d'une rupture et la création d'une nouvelle catégorie de produits par le consommateur.La partie empirique de ce travail a été appliquée dans le domaine le vin, un produit qui traverse une grave crise de consommation. Nous avons retenu une approche expérimentale à travers six études conduites sur des innovations du secteur vinicole. Les résultats ont permis de mettre en évidence le rôle majeur joué par la nature de l'attribut dans la catégorisation ainsi que son influence sur la perception des ruptures d'une catégorie.Du point de vue managérial, les conclusions de ce travail ont pour objet l'efficacité des stratégies d'innovation qui agissent sur les attributs d'un produit et sur leur capacité à différencier une innovation parmi la concurrence. Cette recherche fournit également des suggestions quant au positionnement et à la communication à mettre en place pour faciliter la compréhension d'un nouveau produit et donc son choix par le consommateur. / Title: Categorization and evaluation of innovation: a prospect théory approach applied to the case of low alcohol content wine Every year numerous innovations are available on the market but only a small number meet the hoped-for success. Given this fact, one of the explanations offered by marketing research is the difficulty the consumer has to categorize a new product. This work is part of current research on the categorization of innovation and suggests to consider the uncertainty that characterizes this process. Its originality is to propose a link between research on the categorization of innovation and those of decision making under uncertain conditions. Prospect Theory (Kahneman et Tversky, 1979), in particular, and one of its principles, that of loss aversion, this research has provided a theoretical framework adapted to take into account the uncertainty of innovation. Our research question proposes to determine whether the principle of loss aversion can be applied to explain how the modification of certain attributes of a class causes the perception of a break and create a new category of products by the consumer. The empirical part of this work was conducted on wine, a product that is going through a major crisis of consumption. We chose an experimental approach across six studies conducted on innovations in the wine sector. The results were used to highlight the major role played by the nature of the attribute in the categorization and its influence on the perception of breaks in a category. From the managerial point of view, the conclusions of this work relate to the effectiveness of innovation strategies that affect the attributes of a product in their ability to differentiate an innovation from competition. This work also provides suggestions for the positioning and communication set up to facilitate the understanding of a new product and therefore its choice by the consumer.

In Nigeria, displaced non-Muslim parents living in refugee camps face difficult decisions regarding the schooling of their teenage daughters, who are potential targets of Boko Haram terrorist activities. The purpose of this interpretative phenomenological analysis (IPA) was to qualitatively explore a deeper understanding of the lived experience of displaced non-Muslim parents in Nigeria concerning the schooling of their teenage daughters. Prospect theory provided a theoretical foundation for the study. The theory holds that decision-making is based on the perceived value of gains and losses under risk conditions, rather than solely the perceived final outcome of the risk. The research questions explored how the experience of terrorism affected parents' school-related decision-making, perceptions of the schooling environment and value of education, and risk-taking attitudes. Data were collected through semistructured interviews held with 12 participants from 2 refugee camps. The data were then analyzed using the steps recommended in IPA. Identified themes included parents' experience of trauma, their concern about the vulnerability of their school-going children, and their support for their daughters' education. The findings produced a deeper understanding of the psychological implications of terrorist activities for the families, as well as their perception of the educational needs of teenage girls. Recommendations include providing governmental and nongovernmental support for affected parents and teenage girls. Contributions to positive social change include developing advocacy and resources in support of displaced parents and schools for improving the educational status of teenage girls in Nigeria.