Prospect theory and the investor's attitudes toward risk

Abstract

This paper investigates the investor's attitudes toward risk. It suggests that the investor's risk attitude should be a mixture of risk aversion and risk seeking, which would be consistent with the prospect theory proposed by Kahneman and Tversky [American Psychologist 39(4) (1984), 341–350]. Two experimental studies proved this proposal. As expected, the results of both studies showed that risk-averse attitudes in the domain of gains (positive risk-return relationship) and risk-seeking attitudes in the domain of losses (negative risk-return relationship), which strongly supported the prospect theory.