People risk averse for high probaility of gain / low probability of loss
People risk taker for high probaility of loss / high probability of gain
Utility Theory (risk averse):
People risk averse for low losses at low income level
People risk taker for high gain at high income level
Am I correct?
Another point: under Prospect Theory people tend to overreact to small probability events and underreact to mid/large probability events…how it is linked to the description above reported?
Less risk is better than more risk, all else equal. So investors are risk-averse
Individuals will seek to maximize their utility/satisfaction within the constraints imposed by their budget (ie. income)
You like gains to the same degree you dislike losses
Prospect Theory
Behavioural finance perspective
Individuals don’t focus so much on the probable expected outcomes, but rather the impact (or weight) of a given deviation from their current level of wealth
Therefore, this is where individuals are proven to show they dislike losses twice as much as they like gains (due to behavioural, not “rational economic man”) = loss aversion
Also, under PT we are more likely to lock in gains due to fear of loss