Pitcher, Courtney (2008) *Investigation of a Behavioural Model for Financial Decision Making.* Masters thesis, University of Oxford.

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## Abstract

Many economic models assume that individuals make decisions by maximizing

their expected utility. Expected utility theory was developed to explain

the way people behave when faced with choices under risk and uncertainty.

However, the explanatory power of this theory has come into question because

of systematic violations that have been observed in practice. This paper summarizes these violations and analyses a new theoretical framework that was

introduced to overcome these violations called prospect theory. This theory

was first proposed by Kahneman and Tversky in 1979, but the theory was later

modified to become cumulative prospect theory. The purpose of this paper is to

examine this new theory and to apply its framework to the lottery market. The

parameters of the functional form of cumulative prospect theory are estimated.

A value function with rapidly diminishing sensitivity, and a decision weighting

function that was essentially a step function is found. The implications of these results are examined, and these results are compared to estimates given in the literature.

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

Research Groups: | Mathematical and Computational Finance Group |

ID Code: | 722 |

Deposited By: | Laura Auger |

Deposited On: | 23 Jul 2008 |

Last Modified: | 20 Jul 2009 14:23 |

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