Experimental Economics and the Theory of Finance

Haim Levy

doi:10.1007/978-3-030-91231-4_27

Experimental Economics and the Theory of Finance

Haim Levy^*

^*Corresponding author for this work

BA Business Department

Research output: Chapter in Book/Report/Conference proceeding › Chapter › peer-review

Abstract

Experimental findings and in particular Prospect Theory and Cumulative Prospect Theory contradict Expected Utility Theory, which in turn may have a direct implication to theoretical models in finance and economics. We show growing evidence against Cumulative Prospect Theory. Moreover, even if one accepts the experimental results of Cumulative Prospect Theory, we show that most theoretical models in finance are robust. In particular, the CAPM is intact even if investors make decisions based on change of wealth, employ decision weights, and are risk-seeking in the negative domain.

Original language	English
Title of host publication	Encyclopedia of Finance, Third Edition
Publisher	Springer International Publishing
Pages	849-876
Number of pages	28
ISBN (Electronic)	9783030912314
ISBN (Print)	9783030912307
DOIs	https://doi.org/10.1007/978-3-030-91231-4_27
State	Published - 1 Jan 2022

Bibliographical note

Publisher Copyright:
© Springer Nature Switzerland AG 2022.

Keywords

Certainty effect
Configural weights
Cumulative prospect theory
Decision, weights
Expected utility
Markowitz stochastic dominance
Prospect stochastic, dominance
Prospect theory
Stochastic dominance
Value function

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10.1007/978-3-030-91231-4_27

Cite this

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KW - Markowitz stochastic dominance

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KW - Stochastic dominance

KW - Value function

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Experimental Economics and the Theory of Finance

Abstract

Bibliographical note

Keywords

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