Jiang, Hongyu (2008) *Behavioural Financial Decision Making Under Uncertainty.* Masters thesis, University of Oxford.

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## Abstract

Ever since von Neumann and Morgenstern published the axiomisation of

Expected Utility Theory, there have been a considerable amount of ob-

servations appeared in the literature violating the expected utility theory.

To make decisions under uncertainty, people generally separate possible

outcomes into gains and losses. They are risk averse for gains but risk

seeking for losses with very large probabilities; risk averse for losses but

risk seeking for gains with very small probabilities. To accommodate

these characteristics, Prospect Theory and its improvement Cumulative

Prospect Theory were developed in order to formulate people's behaviours

under uncertainty in a descriptive and normative way. As such, values are

assigned to gains and losses and probabilities are replaced by probability

weighting functions. The CPT models built in this project are based on

the power value function and the compound invariant form of probability

weighting function. The models are calibrated with the data from Hong

Kong Mark Six lottery market. The parameters in the models are esti-

mated, hence to examine properties of the models and give an insights into

how they fit the real life situation. In the first approach, the parameter

in the value function is fixed, but the plots of the estimated probability

weighting function do not give sensible explanations of lottery player's

behaviours. In the second approach, the parameters in value function and

weighting function are both estimated from the data to give an optimal

fitting of the model.

Item Type: | Thesis (Masters) |
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Subjects: | H - N > Mathematics education |

Research Groups: | Mathematical and Computational Finance Group |

ID Code: | 699 |

Deposited By: | Laura Auger |

Deposited On: | 02 Jul 2008 |

Last Modified: | 20 Jul 2009 14:23 |

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