Investment Decision Process
Focusing on the explanation of how accurate decision made can be and clearly identifying the outcomes of each decision made makes it easier for planning and prediction to be made. A theory developed by Tversky and Kahneman help investors in making any decision during an investment deal. Nowadays, investors use prospect theory that was developed by Kahneman and Tversky, (Kahneman and Tversky 10). In this research essay, focus will be driven at the theory and how it is relevant to investment decision making process nowadays. Discussing the prospect theory and its importance will show its relevance through examination and evaluation of its applications to the stock market decision making processes. The theory is divided into two relative stages; the editing stage and the evaluation stage.
The various psychological techniques use in simplifying the risky situations in evaluation phase are reference dependence, loss aversion, diminishing sensitivity to gains and losses, and non-linear probability weight, (Wakker 37). The Importance of Prospect Theory Prospect theory is the only theory that is developed based on cognitive psychology and therefore, it can be used to describe or rather explain illogical behavior of finance, (Rachlinski 24). For instance, some people will prefer not to work over time so that they don’t have to pay any extra taxes. Another example is people who don’t want to invest by depositing their money in a bank as principals so that they can earn income interest. Conclusion In conclusion, Risk are evaluated differently in both stages using different techniques.
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