The Prospect Theory proposes to assess outcomes relative to a reference point (or benchmark). Although the literature recognises the relevance of dynamic benchmarks, most of the applications of Prospect Theory employ static reference points (or a status quo). This paper aims to develop a Prospect Theory framework for investment under uncertainty subject to a dynamic reference point, within the context of environmental policy making, where the distinction between a dynamic and a static frameworks is crucial. I evince that, in contrast to the static framework, in a dynamic framework the investor measures not only the absolute but also the relative risk premium (Sharpe ratio) of the investment opportunity, incorporating the risks and returns of a reference portfolio. I propose that there exists a relation between static and dynamic frameworks. Using the dynamic framework, I argue that in the environmental context international co-operation is the key to a successful environmental policy
Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:528384 |
Date | January 2010 |
Creators | Vinokur, Leon |
Publisher | Queen Mary, University of London |
Source Sets | Ethos UK |
Detected Language | English |
Type | Electronic Thesis or Dissertation |
Source | http://qmro.qmul.ac.uk/xmlui/handle/123456789/1708 |
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