Behavioral Finance in Brazil: applying the prospect theory to potential investors

Claudia Emiko Yoshinaga, Thiago Borges Ramalho


The premise of unbounded rationality defended
by the Efficient Market Hypothesis is challenged
by the theoretical framework that involves
Behavioral Finance, whose basis, Kahneman and
Tversky’s Prospect Theory (1979), questions the
Expected Utility Theory, an important element
of Neoclassical Economics, as basis for decisionmaking.
This research aims to replicate the
empirical research of Kahneman and Tversky’s
seminal article (1979) to evaluate the decisionmaking
process of employees (potential investors)
from a major national financial institution. The
results of this study were compared to those
obtained in the original article and to other
similar studies. The questionnaire employed
was an adaptation of the one originally used,
so that we could test, in the studied sample,
the applicability of the Prospect Theory, more
specifically with regard to Certainty, Reflection
and Isolation Effects. We also analyzed differences
in the decision-making process considering
respondents’ attributes (gender, age and income).
The results confirmed that behavioral effects
do exist, and proved that a large portion of the
sample presented significant inconsistency in their
choices according to Expected Utility Theory
principles, highlighting that their decisions were
not made according to strictly rational behavior.
Furthermore, we analyzed the relationship
between violations and investor characteristics
by estimating a linear model. Results indicate
that both age and level of income were negatively
related to total violations.


Prospect theory. Heuristics. Cognitive biases. Decision-making process. Investor characteristics.


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