Stock market decision-making in the light of prospect theory

Lakatos, Artur Lóránd and Botos, Ákos (2024) Stock market decision-making in the light of prospect theory. PÉNZÜGYI SZEMLE/PUBLIC FINANCE QUARTERLY (1963-), 70 (2). pp. 65-92. ISSN 0031-496X

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Abstract

One of the main insights of prospect theory is that investment decisions are often irrational, following certain trends, and this is particularly true for individual investment decisions. The theory’s main proponents and its developers have described the phenomenon of risk seeking over losses and risk aversion over gains, mainly by looking at stock market trends. One of the hypotheses of our paper is that investors become risk averse in times of crisis. The other hypothesis is that the hummingbird effect can be detected in stock market trading. Using linear regression, we have been able to show that investors become more risk averse in times of crisis, which can also be seen in stock market trading, through the shift in the index. In addition, we have also been able to show that the hummingbird effect can also be detected in stock market trading.

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