Browsing by Subject "Prospect theory"

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    A model based on Copula Theory for sustainable and social responsible investments
    (2016) Bilbao-Terol, Amelia; Arenas-Parra, Mar; Cañal-Fernández, Verónica
    In this paper, a model is proposed that allows us to obtain a portfolio made up of sustainable and socially responsible (SR) investment funds. This portfolio tracks the one that investors might have chosen if they had not taken into account social, ethical and ecological (SEE) issues in their investment decisions. Therefore, in the first stage, reference portfolio exclusively made up of conventional funds is obtained. For the construction of the conventional portfolio the Prospect Theory has been used: net profits as the financial objective and error function as the utility function. In the second stage, a portfolio consisting exclusively of SR-funds is built. To do so, the reference portfolio is used as an ideal point, with the objectives of the SR-investor being the relative wealth with respect to the reference portfolio and the SEE quality of the portfolio. The relative wealth will be manipulated by a downside-risk measure, the Conditional Value at Risk (CVaR), and the periodic values of the portfolio. The second objective is the SR Quality of the portfolio, taking into account the personal values of a particular investor. This is built using Fuzzy Set Theory tools. We are faced with a multi-objective problem which is solved by using Goal Programming methodology. The estimation of both conventional and SR markets has been carried out by a semi-parametric approach by using the Copula Theory for modeling the dependence structure of the assets’ returns. The approach has been applied to a set of 38 conventional and 12 ethical funds domiciled in Spain.
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    Resolving inconsistencies in utility measurement under risk: test of generalizations of expected utilities
    (Institute for Operations Research and Management Sciences, 2007-03-01) Bleichrodt, Han; Abellán Perpiñán, José María; Pinto Prades, José Luis; Méndez Martínez, Ildefonso; Economía Aplicada
    This paper explores inconsistencies that occur in utility measurement under risk when expected utility theory is assumed and the contribution that prospect theory and some other generalizations of expected utility can make to the resolution of these inconsistencies. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studied, prospect theory was the most consistent with our data. The main improvement of prospect theory over expected utility was in comparisons between a riskless and a risky prospect (riskless-risk methods). We observed no improvement over expected utility in comparisons between two risky prospects (risk-risk methods). An explanation for the latter observation may be that there was less distortion in probability weighting in the interval [0.10, 0.20] than has commonly been observed.