Experimental Study Of The Impact Of Earnings And States On Individual Risk Behaviors

By combining psychological factors of decision-makers with economics model through elaborate designed psychology experiments, Kaheman and Tversky put forward an alternative model of expected utility theory, prospect theory, which explains many anomalies that other theories including the classical decision-making theory cannot explain. It is believed that decision-makers exist systematic biases on the evaluation of probability and subjective value under prospect theory, leading to irrational behaviors which don't meet the expectations of expected utility theory. However, as a descriptive model, prospect theory lacks normative expression and mathematical logic deduction, and only can be used to describe the behaviors of the decision-maker. In other words, prospect theory can only explain the actual decision-making behaviors, and can not guide how decision-makers should make decisions.Considering the descriptive characteristics of prospect theory, this thesis explore the impacts of prior-period profits and states on the risk behaviors of decision-makers through behavior experiments and extend the explanatory power of prospect theory under some special situations. Specific, in the first experiment certainty equivalent method is adopted to analyze the behaviors of participants under the situation where participants get profits before decision-making. Results show that risk attitude of participants who get profits before decision making doesn't change obviously in gain domain. However, participants are becoming more risk seeking in loss domain which is more evident when loss becomes larger. Moreover, the research discovers that risk attitude of decision-makers changes along with the significant change of value function, while decision weighting does not change substantially during this process. In the second experiment, the thesis discuss the impacts of prior-period state(that is, the status quo is superior to the previous state) on risk behaviors of decision-makers when decision-makers get profits before decision-making. Results show that prior-period state has a similar influence like minimum requirements. That is, decision-makers tend to choose the prospect that has the outcome higher than the prior-period state, ignoring expected return and risk.The conclusions of this thesis play an important role in interpreting actual decision-making behaviors. For example, investors can optimize their investment decision by applying prospect theory and relevant conclusions into the investment decision-making problems, and gain a higher yield with matched risk. Another example of this is application in game theory. By introducing prospect theory into game model, we can extend the model to take emotional, psychological and behavior factors of participants into account, enhancing the explanation and predictive power of the game model.