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Bank Risk-Taking in a Prospect Theory Framework Empirical Investigation in the Emerging Markets’ Case

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  • Christophe Godlewski

    (LaRGE, Institut d'Etudes Politiques, Université Robert Schuman, Strasbourg 3)

Abstract

The purpose of this paper is to investigate the validity of some behavioral conjectures as alternative explanations of bank risk-taking behavior. We especially focus on the different valuation of gains and losses relative to a reference point, and the changing attitude toward risk conditional on the domain (gains vs losses) features (Tversky and Kahneman 1992). We follow a methodology based on Fiegenbaum and Thomas (1988) and the Fishburn (1977) measure of risk, applied to a sample of banks from emerging market economies. Preliminary results show that the Tversky and Kahneman (1992) framework could provide an alternative for explaining risk-taking behavior in the banking industry. Bankers located above benchmark levels, exhibit risk aversion. Although, further investigations are needed in order to consolidate our conclusions.

Suggested Citation

  • Christophe Godlewski, 2004. "Bank Risk-Taking in a Prospect Theory Framework Empirical Investigation in the Emerging Markets’ Case," Finance 0409024, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0409024
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    References listed on IDEAS

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    Cited by:

    1. Ben Salah Mahdi, Ines & Boujelbène Abbes, Mouna, 2018. "Behavioral explanation for risk taking in Islamic and conventional banks," Research in International Business and Finance, Elsevier, vol. 45(C), pages 577-587.
    2. Olapeju Comfort Ogunmokun & Oluwasoye P. Mafimisebi & Demola Obembe, 2023. "Prospect theory and bank credit risk decision-making behaviour: a systematic literature review and future research agenda," SN Business & Economics, Springer, vol. 3(4), pages 1-25, April.

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    More about this item

    Keywords

    Cumulative Prospect Theory; bank risk taking; emerging market economies;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • F39 - International Economics - - International Finance - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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