The Conditional CAPM Does Not Explain Asset-Pricing Anomalies

Prospect theory is widely viewed as the best available descriptive model of how people evaluate risk in experimental settings. According to prospect theory, people are risk-averse with respect to gains and risk-seeking with respect to losses, a phenomenon called "loss aversion". Despite of the fact that prospect theory has been well developed in behavioral economics at the theoretical level, there exist very few large-scale empirical studies and most of them have been undertaken with micro-panel data. Here we analyze over 28.5 million trades made by 81.3 thousand traders of an online financial trading community over 28 months, aiming to explore the large-scale empirical aspect of prospect theory. By analyzing and comparing the behavior of winning and losing trades and traders, we find clear evidence of the loss aversion phenomenon, an essence in prospect theory. This work hence demonstrates an unprecedented large-scale empirical evidence of prospect theory, which has immediate implication in financial trading, e.g., developing new trading strategies by minimizing the effect of loss aversion. Moreover, we introduce three risk-adjusted metrics inspired by prospect theory to differentiate winning and losing traders based on their historical trading behavior. This offers us potential opportunities to augment online social trading, where traders are allowed to watch and follow the trading activities of others, by predicting potential winners statistically based on their historical trading behavior rather than their trading performance at any given point in time.

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Prospect Theory for Online Financial Trading

Most decisions must be made without advance knowledge of their consequences. Economists and psychologists have devoted much attention to modeling decisions made under conditions of risk in which options can be characterized by a known probability distribution over possible outcomes. The descriptive shortcomings of classical economic models motivated the development of prospect theory (D. Kahneman, A. Tversky, Prospect theory: An analysis of decision under risk. Econometrica, 4 (1979) 263‐291; A. Tversky, D. Kahneman, Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5 (4) (1992) 297‐323) the most successful behavioral model of decision under risk. In the prospect theory, subjective value is modeled by a value function that is concave for gains, convex for losses, and steeper for losses than for gains; the impact of probabilities are characterized by a weighting function that overweights low probabilities and underweights moderate to high probabilities. We outline the possible neural bases of the components of prospect theory, surveying evidence from human imaging, lesion, and neuropharmacology studies as well as animal neurophysiology studies. These results provide preliminary suggestions concerning the neural bases of prospect theory that include a broad set of brain regions and neuromodulatory systems. These data suggest that focused studies of decision making in the context of quantitative models may provide substantial leverage towards a fuller understanding of the cognitive neuroscience of decision making. D 2005 Elsevier B.V. All rights reserved. Theme: Neural basis of behavior Topic: Cognition

Research report Prospect theory on the brain? Toward a cognitive neuroscience of decision under risk

We study two different ways of forming multi-partner alliances between firms with the central idea that procedure is an important factor in multi-partner alliance formation. In the first procedure, an alliance is formed simultaneously, while in the second, step-by-step procedure, members are added one by one. In the model we present, each firm is assumed to have a multidimensional maneuvering space, which consists of all alliance positions acceptable to the firm, and an ideal position in this space. Alliances will form between the firms whose maneuvering spaces overlap. The results of the analysis confirm that procedure is an important factor in multi-partner alliance formation. Nevertheless, if ideal positions of firms are acceptable to all alliance partners, then the result of alliance formation does not depend on procedure. In addition, it is shown that it can be disadvantageous to be a first mover. Finally, we are able to provide sufficient conditions under which one procedure is preferred in a three-partner case. More specifically, a firm with its ideal position acceptable to the two other firms may prefer the simultaneous procedure to being a late mover if (1) there is a certain balance in the firms' degree of flexibility and their power and (2) if the agreed alliance position of the two other firms is acceptable to the firm in question.

On Some Procedures of Forming a Multi-partner Alliance

The dollar volume of outstanding instruments in the global Auction-Rate Securities (“ARS”) market exceeded US$20 Trillion (twenty trillion US dollars) in 2019.

Perception-Based Decisions, Strategic Alliances and Optimal Financial Contracting: Auctions, Strategic Alliances and a Critique of Third-Generation Prospect Theory and Related Approaches

The Global Financial Crisis and stock market crashes that occurred in various countries during 2000–2015 have exposed significant weaknesses in economies, Stock Indices and “Regulatory Strategic Alliances” and Intertemporal Asset Pricing Theories.

Financial Indices, Joint Ventures and Strategic Alliances Invalidate Cumulative Prospect Theory, Third-Generation Prospect Theory, Related Approaches and Intertemporal Asset Pricing Theory: HCI and Three New Decision Models

Michael I. C. Nwogugu

Papers

Financial Indices, Joint Ventures and Strategic Alliances Invalidate Cumulative Prospect Theory, Third-Generation Prospect Theory, Related Approaches and Intertemporal Asset Pricing Theory: HCI and Three New Decision Models