Lecture notes
Topic 10 - Psychology of Money
Topic 10 - Psychology of Money
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
Seller
Follow
Content preview
Behavioural Finance Topic 10 – Psychology of MoneyRecap from last week on CPT
• Key anomalies in EU theory that prospect theory must accommodate
▪ Asymmetry between how people regard gains and losses (loss aversion): people
weigh losses much more than gains. In expected utility theory, there is a symmetry.
▪ People tend to judge things relative to a reference point rather than in absolute terms
as ‘expected utility theory’. Expected utility is defined in terms of absolute wealth and
prospect theory is defined in terms of gains and losses (relative to a reference point).
▪ Overweighting of low probabilities in decision making and underweighting of high
probabilities relative to certainty. People tend to act in ways that are risk adverse
when gains are involved. In terms of losses, people prefer to take a gamble, even if
the expected losses are greater than the expected gains.
▪ Framing: the way problems are framed affects people’s decisions and choices.
People behave differently depending on how things are framed.
Gains Losses
People tend to be risk-averse: People tend to be risk-seeking:
prefer certain gains to gamble to avoid certain losses
uncertain ones with higher ER (take gamble with worse ER)
Low probabilities People may switch to People may switch to
risk-seeking behaviour (e.g. risk-aversion: e.g. buy
buy lottery tickets where cost of insurance where cost of
ticket is greater than ‘expected’ insurance is greater than value
winnings) of expected losses (claim)
• Cumulative Prospect Theory
▪ Prospect Theory (value function): replaces expected utility function.
▪ Decision weighting function: translates objective probabilities into ones that people
act on.
, ▪ Integration and segregation
For numerical questions on prospect theory in the exam (like Thomas question of previous week)
Look at Q3 from 2016 exam paper.
Today
Psychological aspects of money
• Social versus market norms
• Pay, motivation and performance
• Money, honesty and cheating
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller alfonsoyageyges. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £7.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
49160 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy revision notes and other study material for 14 years now