Abstract:
Behavioural finance has received a major impetus over the last two decades. In
this paper, we discuss the foundations which have helped in this paradigm
shift from traditional Efficient Market Hypothesis (EMH) to the more experimental
branch of finance, namely behavioural finance. We discuss EMH
in the context of its critics, and present alternative theories as well as psychological
concepts that are useful in understanding behavioural finance. We
conduct 3 separate experiments to test Prospect theory, a popular theory put
forth by Kahneman & Tversky [1]. We conduct the experiments on a different
type of respondent group than that has been used in the past. Using a relatively
homogenous group well versed in probability and statistics, we find that
career professionals exhibit less biases than student subjects that have been
used in such experiments in the past.
