Risk Profile

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  • Topic: Prospect theory, Risk, Behavioral finance
  • Pages : 1 (301 words )
  • Download(s) : 545
  • Published : October 1, 2008
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Paper Chosen: Theory of Behavioural Finance and its Application to Property Market: A Change in Paradigm.- Dr Rohit Kishore, University of Western Sydney, Australia.

This Paper focuses mainly on the concepts of Behavioral Finance with respect to Prospect Theory- Tversky and Kanheman (1997). The proponents of the Property Market are discussed to great lengths by Kishore. One of the central themes surrounding Prospect Theory is how individuals may act risk-averse in terms of gains but is risking seeking in terms of losses. Keeping in line with the underlying principles of Prospect Theory- Kishore looks at how the change in preferences from being risk-averse to risk-takers, is likely to be the foremost rationale for explaining the property boom in Australia between 1999 and 2003 ( ABS, 2004). Where over the long term, established house prices had doubled.

In looking at the validity and accuracy of the study there are many arguments presented that further support Prospect Theory. Another example centers on the application of preference and ambiguity biases in explaining the equity premium and volatility puzzles. The eventual resolution of the volatility puzzle can further aid us in our understanding of the property pricing behavior, both in listed and direct markets.

The Property Market was also compared to the Stock market, a market that has more readily available information, which is much more rational and is generally more efficient than the Property market. This further makes it important that Behavioral based research should be further directed towards analyzing property, a market which is segmented, is less informed and efficient and has a high human presence. In conclusion it is apparent that a lot of solid research and data had been sourced well as evidenced by the extensive use of other well-known articles and papers littered throughout the paper.
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