Abstract:
Twenty years of experimental and empirical research has demonstrated that markets are not as efficient as perceived
to be. Investors are not rational and risk preferences are stochastic. In addition to this, prospect theory criticized the
standard expected utility hypothesis used to describe utility and investor performance preferences. Kahneman and
Tversky in 1979 proposed a new framework to model the utility and risk preferences of investors. This study
examined investment scenarios with individual investors indicating that the process of making investment decisions
is based on the behavioral economics theory which uses the fundamental aspects of the prospect theory developed by
Kahneman and Tversky. The study tested two items: firstly framing which modifies the investment decision
depending on the perspective given to the problem and secondly loss aversion which refers to a scenario where
greater utility is lost when losing x amount of money than the utility that is gained when obtaining the exact same
amount. The study concluded that framing effects influenced the decisions made by individual investors and
individual investors had their investment decisions affected by loss aversion.
