Indian Journal of Finance

Open Access Open Access  Restricted Access Subscription Access

Experimental Evidences for Prospect Theory in Vietnam


Affiliations
1 Associate Professor, Faculty of Banking and Finance, Foreign Trade University, 91 Chua Lang St., Ha Noi, Viet Nam
2 Master Student, Lisbon School of Economics and Management, Lisbon, Portugal
3 MSc, University of Nottingham, Nottingham, United Kingdom
4 PhD., Faculty of Banking and Finance, Foreign Trade University, 91 Chua Lang St., Ha Noi, Viet Nam

   Subscribe/Renew Journal


In the context of growing literature about behavioral finance and experimental research, there is an urgent need to expand this contemporary branch in emerging markets in general and Vietnam in particular. Therefore, this paper aimed at finding evidence of prospect theory in Vietnam using a battery of experimental approach. The objective of experiment design is to understand the economic market and represent almost all risk suffering levels. The research outcomes strengthened arguments of prospect theory in terms of both slope and reference point. This research found evidence for the hypothesis that the utility curve reference point lies in the positive domain. This suggested that in the case of low profitability, investors could still prefer risk over certainty, but they shall be more risk averse as returns are increased. Besides, the relationship between loss aversion and other behavioral biases was also examined, and evidence of strong relation between loss aversion and anchoring and overreaction was found, while there existed no clear correlation between loss aversion and overconfidence. The findings of this paper shed light on current research about behavioral finance, especially about prospect theory in Vietnam, suggesting a pilot approach to find evidence of various behavioral biases that might affect stock market investors’ decisions.

Keywords

Behavioral Finance, Experimental Research, Loss Aversion, Prospect Theory, Vietnam.

JEL Classification Codes : G10, G11, G41.

Paper Submission Date : February 5, 2020 ; Paper sent back for Revision : September 18, 2020 ; Paper Acceptance Date : December 20, 2020 ; Paper Published Online : July 5, 2021.

User
Subscription Login to verify subscription
Notifications
Font Size

  • Abdellaoui, M. (2000). Parameter - Free elicitation of utility and probability weighting functions. Management Science, 46(11), 1497–1512. https://www.jstor.org/stable/2661664

  • Abdellaoui, M., Bleichrodt, H., & Kammoun, H. (2011). Do financial professionals behave according to prospect theory ? An experimental study. Theory and Decision, 74(3), 411–429. https://doi.org/10.1007/s11238-011-9282-3

  • Abdellaoui, M., Bleichrodt, H., & Paraschiv, C. (2007). Loss aversion under prospect theory : A parameter-free measurement. Management Science, 53(10), 1659–1674. https://doi.org/10.1287/mnsc.1070.0711

  • Alquraan, T., Alqisie, A., & Al Shorafa, A. (2016). Do behavioral finance factors influence stock investment decisions of individual investors ? (Evidences from Saudi Stock Market). American International Journal of Contemporary Research, 6(3), 159–169.

  • Barberis, N., Huang, M., & Santos, T. (2001). Prospect theory and asset prices. The Quarterly Journal of Economics, 116(1), 1– 53. https://doi.org/10.1162/003355301556310

  • Benartzi, S., & Thaler, R. (1993). Myopic loss aversion and the equity premium puzzle. The Quarterly Journal of Economics, 110(1), 73–92. https://doi.org/10.3386/w4369

  • Bleichrodt, H., Pinto, J. L., & Wakker, P. P. (2001). Making descriptive use of prospect theory to improve the prescriptive use of expected utility. Management Science, 47(11), 1498–1514. https://doi.org/10.1287/mnsc.47.11.1498.10248

  • Camerer, C. F., Loewenstein, G., & Rabin, M. (Eds.). (2004). Advances in behavioral economics. In, The roundtable series in behavioral economics. Princeton University Press. https://doi.org/10.1515/9781400829118

  • Costa, D. F., Carvalho, F. D., & Moreira, B. C. (2019). Behavioral economics and behavioral finance : A bibliometric analysis of the scientific fields. Journal of Economic Surveys, 33(1), 3–24. https://doi.org/10.1111/joes.12262

  • Dangi, M., & Kohli, B. (2018). Role of behavioral biases in investment decisions : A factor analysis. Indian Journal of Finance, 12(3), 43–57. https://doi.org/10.17010/ijf/2018/v12i3/121997

  • Dzung, P. T., & Quang, H. P. (2019). Adaptive market hypothesis : Evidence from the Vietnamese stock market. Journal of Risk and Financial Management, 12(2), 81. https://doi.org/10.3390/jrfm12020081

  • Fishburn, P. C., & Kochenberger, G. A. (1979). Two-piece Von Neumann-Morgenstern utility functions. Decision Sciences, 10(4), 503–518. https://doi.org/10.1111/j.1540-5915.1979.tb00043.x

  • Isidore, R. R., & Christie, P. (2018). Investment behavior of secondary equity investors : An examination of the relationship among the biases. Indian Journal of Finance, 12(9), 7–20. https://doi.org/10.17010/ijf/2018/v12i9/131556

  • Kahneman, D., & Tversky, A. (1979). Prospect theory : An analysis of decision under risk. Econometrica, 47(2), 263–292. https://doi.org/10.2307/1914185

  • Köbberling, V., & Wakker, P. P. (2005). An index of loss aversion. Journal of Economic Theory, 122(1), 119–131. https://doi.org/10.1016/j.jet.2004.03.009

  • Mehta, K., & Chander, R. (2010). Examination of January, December and November effects on the Indian stock market. Indian Journal of Finance, 4(9), 25–33. http://www.indianjournaloffinance.co.in/index.php/IJF/article/view/72570

  • Neilson, W. S. (2002). Comparative risk sensitivity with reference-dependent preferences. Journal of Risk and Uncertainty, 24(2), 131–142. https://doi.org/10.1023/A:1014015926103

  • Nguyen, Q., Villeval, M. C., & Xu, H. (2012). Trust and trustworthiness under the prospect theory : A field experiment in Vietnam. http://dx.doi.org/10.2139/ssrn.2144628

  • Pennings, J. M., & Smidts, A. (2003). The shape of utility functions and organizational behavior. Management Science, 49(9), 1251–1263. https://doi.org/10.1287/mnsc.49.9.1251.16566

  • Phan, D. T., Le, V. H., & Nguyen, T. T. (2020). Overconfidence bias, comparative evidences between Vietnam and selected ASEAN countries. The Journal of Asian Finance, Economics and Business, 7(3), 101–113. https://doi.org/10.13106/JAFEB.2020.VOL7.NO3.101

  • Quiggin, J. (1982). A theory of anticipated utility. Journal of Economic Behavior & Organization, 3(4), 323–343. https://doi.org/10.1016/0167-2681(82)90008-7

  • Raghuram, G., & Erickson, C. (2017). Identifying structural breaks in asset pricing behavior in the Indian context. Indian Journal of Finance, 11(6), 7–20. https://doi.org/10.17010/ijf/2017/v11i6/115592

  • Raut, R. K., & Das, N. (2015). Behavioral prospects of individual investor decision making process : A review. Indian Journal of Finance, 9(4), 44–55. https://doi.org/10.17010/ijf/2015/v9i4/71457

  • Schmidt, U., & Traub, S. (2002). An experimental test of loss aversion. Journal of Risk and Uncertainty, 25(3), 233–249. https://doi.org/10.1023/A:1020923921649

  • Tversky, A., & Kahneman, D. (1992). Advances in prospect theory : Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5(4), 297–323. https://doi.org/10.1007/BF00122574

  • Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior & Organization, 1(1), 39–60. https://doi.org/10.1016/0167-2681(80)90051-7

  • Trang, K. H., & Nguyen, Q. (2019). Manager’s risk and time preferences in economic behavior : Review from the experiment. Journal of International Economics and Management, 118, 33–49. http://tracuutapchi.ftu.edu.vn/index.php/tcqlktqt/article/view/553

  • Vo, X. V., Vo, V. P., & Nguyen, T. P. (2020). Abnormal returns and idiosyncratic volatility puzzle : An empirical investigation in Vietnam stock market. Cogent Economics & Finance, 8(1), Article 1735196. https://doi.org/10.1080/23322039.2020.1735196

  • Vo, X. V., & Thao, L. D. (2013). Empirical investigation of efficient market hypothesis in Vietnam stock market. http://dx.doi.org/10.2139/ssrn.2226866

  • Von Neumann, J., & Morgenstern, O. (1945). John von Neumann faculty file : Theory of games and economic behavior with Oskar Morgenstern. Director's Office : Faculty files. Institute for Advanced Study. https://albert.ias.edu/handle/20.500.12111/2546

  • Wakker, P., & Deneffe, D. (1996). Eliciting von Neumann - Morgenstern utilities when probabilities are distorted or unknown. Management Science, 42(8), 1131–1150. https://doi.org/10.1287/mnsc.42.8.1131

  • Wakker, P., & Tversky, A. (1993). An axiomatization of cumulative prospect theory. Journal of Risk and Uncertainty, 7(2), 147–175. https://doi.org/10.1007/BF01065812


Abstract Views: 368

PDF Views: 1




  • Experimental Evidences for Prospect Theory in Vietnam

Abstract Views: 368  |  PDF Views: 1

Authors

Phan Tran Trung Dzung
Associate Professor, Faculty of Banking and Finance, Foreign Trade University, 91 Chua Lang St., Ha Noi, Viet Nam
Nguyen Xuan Tung
Master Student, Lisbon School of Economics and Management, Lisbon, Portugal
Le Hoang Thu Van
MSc, University of Nottingham, Nottingham, United Kingdom
Nguyen Thi Ha Thanh
PhD., Faculty of Banking and Finance, Foreign Trade University, 91 Chua Lang St., Ha Noi, Viet Nam

Abstract


In the context of growing literature about behavioral finance and experimental research, there is an urgent need to expand this contemporary branch in emerging markets in general and Vietnam in particular. Therefore, this paper aimed at finding evidence of prospect theory in Vietnam using a battery of experimental approach. The objective of experiment design is to understand the economic market and represent almost all risk suffering levels. The research outcomes strengthened arguments of prospect theory in terms of both slope and reference point. This research found evidence for the hypothesis that the utility curve reference point lies in the positive domain. This suggested that in the case of low profitability, investors could still prefer risk over certainty, but they shall be more risk averse as returns are increased. Besides, the relationship between loss aversion and other behavioral biases was also examined, and evidence of strong relation between loss aversion and anchoring and overreaction was found, while there existed no clear correlation between loss aversion and overconfidence. The findings of this paper shed light on current research about behavioral finance, especially about prospect theory in Vietnam, suggesting a pilot approach to find evidence of various behavioral biases that might affect stock market investors’ decisions.

Keywords


Behavioral Finance, Experimental Research, Loss Aversion, Prospect Theory, Vietnam.

JEL Classification Codes : G10, G11, G41.

Paper Submission Date : February 5, 2020 ; Paper sent back for Revision : September 18, 2020 ; Paper Acceptance Date : December 20, 2020 ; Paper Published Online : July 5, 2021.


References





DOI: https://doi.org/10.17010/ijf%2F2021%2Fv15i5-7%2F164491