Experimental Economics and the Theory of Finance

Haim Levy

doi:10.1007/978-1-4614-5360-4_27

Experimental Economics and the Theory of Finance

Haim Levy^*

^*Corresponding author for this work

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

1 Scopus citations

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
Publisher	Springer US
Pages	395-410
Number of pages	16
ISBN (Electronic)	9781461453604
ISBN (Print)	9781461453598
DOIs	https://doi.org/10.1007/978-1-4614-5360-4_27
State	Published - 1 Jan 2013
Externally published	Yes

Bibliographical note

Publisher Copyright:
© Springer Science+Business Media New York 2013.

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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10.1007/978-1-4614-5360-4_27

Cite this

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KW - Configural weights

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KW - Decision weights

KW - Expected utility

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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