Behavioral Implications of Risk-Return Associations: An Application of Prospect Theory on CNX NIFTY Companies

Abstract

This study primarily investigates the risk attitudes of the fifty CNX NIFTY companies from a behavioral perspective as proposed by Kahneman and Tversky (1979) and Tversky and Kahneman (1992). It hypothesizes that for below target returns, a large majority of Indian companies would be risk-seeking, and for above target returns, most of them would be risk-averse. To fulfil its objectives, this study uses rates of return on assets and equity and the capital ratios of fifty CNX NIFTY companies over the period [2009][2010][2011][2012][2013]. It also uses Kendall's (1938) AbstractThis study primarily investigates the risk attitudes of the fifty CNX NIFTY companies from a behavioral perspective as proposed by Kahneman and Tversky (1979) and Tversky and Kahneman (1992). It hypothesizes that for below target returns, a large majority of Indian companies would be risk-seeking, and for above target returns, most of them would be riskaverse. To fulfil its objectives, this study uses rates of return on assets and equity and the capital ratios of fifty CNX NIFTY companies over the period -2013. It also uses Kendall's (1938 test to measure the correlations between above variables within the relevant groups (all companies and each sub group [under Size and Industry]). Results show that bigger and smaller Indian companies and their managers are mostly risk-seeking and risk-averse respectively and shareholders-centric in regard to their attitude. These results will have important implications for the Indian companies and managers in evaluating their risk attitudes from the behavioral perspective.JEL Classification: E37, F37, G12

Mapping the Landscape of Behavioral Theories: Systematic Literature Review

“…For example, prospect theory is one of the major theories used in behavioral economics or in the general subjects of urban and environmental planning, yet its founders Kahneman and Tversky (1979) are psychologists. In fact, from our reading, it became apparent that a vast number of the research area of behavioral economics are largely about applying psychological theories to economics such as prospect theory (e.g., Dasgupta 2017), the theory of delay discounting and cognitive dissonance theory (e.g., Laajaj 2017), construal level theory (Fiedler 2007), behavioral decision theory (e.g., Morton and Fasolo 2009), and behavioral reasoning theory (e.g., Claudy, Peterson, and O’Driscoll 2013).…”

“…Another cause may be the large influence that an international bestseller book, "Nudge" (Thaler and Sunstein 2008), made on politics and business worldwide including the United States, United Kingdom, and Australia (Berg 2015;Bradshaw 2015;Chakrabortty 2008;Easton 2015). Along with this trend, many academics and practitioners have developed interest in applying various behavioral theories in their research: neural networks theory (e.g., Justo et al 2017), reinforcement learning theory (e.g., Ertugrul and Tagluk 2017), game theory (e.g., Gintis 2014), the theory of planned behavior (e.g., Wolske, Stern, and Dietz 2017), nudge theory (e.g., Abdulkadirov 2016), and prospect theory (e.g., Dasgupta 2017) to name a few.…”

How do beliefs and attitudes of people influence energy conservation behavior in Pakistan?

“…Recent literature has reasonably provided theories that explain the psychological process ( Wittenberg et al., 2018 ). These theories include the theory of planned behavior ( Wolske et al., 2017 ), nudge theory ( Abdulkadirov, 2016 ), game theory ( Gintis, 2009 ), and reinforcement learning theory ( Ertugrul and Tagluk, 2017 ), and prospect theory ( Dasgupta, 2017 ).…”