Related papers: Prospect Theory for Online Financial Trading
Consider an investor trading dynamically to maximize expected utility from terminal wealth. Our aim is to study the dependence between her risk aversion and the distribution of the optimal terminal payoff. Economic intuition suggests that…
This paper investigates the dynamics of gambling and how they can affect risk-taking behavior in regions not explored by Kahneman and Tversky's Prospect Theory. Specifically, it questions why extreme outcomes do not fit the theory and…
Positive feedback trading, which buys when prices rise and sells when prices fall, has long been criticized for being destabilizing as it moves prices away from the fundamentals. Motivated by the relationship between positive feedback…
Cumulative prospect theory (CPT) is known to model human decisions well, with substantial empirical evidence supporting this claim. CPT works by distorting probabilities and is more general than the classic expected utility and coherent…
A microeconomic approach is proposed to derive the fluctuations of risky asset price, where the market participants are modeled as prospect trading agents. As asset price is generated by the temporary equilibrium between demand and supply,…
The fundamental principle in Modern Portfolio Theory (MPT) is based on the quantification of the portfolio's risk related to performance. Although MPT has made huge impacts on the investment world and prompted the success and prevalence of…
The methodology presented provides a quantitative way to characterize investor behavior and price dynamics within a particular asset class and time period. The methodology is applied to a data set consisting of over 250,000 data points of…
Lotteries are a prevalent form of gambling between a seller and buyers. Designing a lottery requires a model of how buyers make decisions when confronted with uncertain outcomes. Cumulative prospect theory (CPT) is a descriptive model that…
It is essential to incorporate the impact of investor behavior when modeling the dynamics of asset returns. In this paper, we reconcile behavioral finance and rational finance by incorporating investor behavior within the framework of…
Noncooperative games with uncertain payoffs have been classically studied under the expected-utility theory framework, which relies on the strong assumption that agents behave rationally. However, simple experiments on human decision makers…
This paper investigates the dynamics of noncooperative interactions between artificial intelligence agents and human decision-makers in strategic environments. In particular, motivated by extensive literature in behavioral Economics, human…
We show in a simulation when economic agents are subject to evolution (random change and selection based on the success in the estimation of the result of the gamble) they acquire risk aversive behavior. This behavior appears in the form of…
Several examples of Cyber-physical human systems (CPHS) include real-time decisions from humans as a necessary building block for the successful performance of the overall system. Many of these decision-making problems necessitate an…
Take up of microcredit by the poor for investment in businesses or human capital turned out to be very low. We show that this could be explained by risk aversion, without relying on fixed costs or other forms of non-convexity in the…
The standard approach for constructing a Mean-Variance portfolio involves estimating parameters for the model using collected samples. However, since the distribution of future data may not resemble that of the training set, the…
Protecting against cyber-threats is vital for every organization and can be done by investing in cybersecurity controls and purchasing cyber insurance. However, these are interlinked since insurance premiums could be reduced by investing…
Technical trading represents a class of investment strategies for Financial Markets based on the analysis of trends and recurrent patterns of price time series. According standard economical theories these strategies should not be used…
We describe a simple model for speculative trading based on adaptive behavior of economic agents.The adaptive behavior is expressed through a feedback mechanism for changing agents' stock-to-bond ratios, depending on the past performance of…
We propose a novel approach to infer investors' risk preferences from their portfolio choices, and then use the implied risk preferences to measure the efficiency of investment portfolios. We analyze a dataset spanning a period of six…
We investigate the concept of network momentum, a novel trading signal derived from momentum spillover across assets. Initially observed within the confines of pairwise economic and fundamental ties, such as the stock-bond connection of the…