IDEAS home Printed from https://ideas.repec.org/a/eee/riibaf/v45y2018icp577-587.html
   My bibliography  Save this article

Behavioral explanation for risk taking in Islamic and conventional banks

Author

Listed:
  • Ben Salah Mahdi, Ines
  • Boujelbène Abbes, Mouna

Abstract

The objective of this paper is to provide a behavioral explanation for risk taking in Islamic and conventional banks. Within the prospect theory framework; we consider the bias of loss aversion and mental accounting to explain the risk behavior in Islamic and conventional banks in the MENA region. We use the Fishburn's (1977) risk measure and the Kendall’s t to test the prospect theory predictions. Several measures of performance and risk are used as target level. The results for the two types of banks are too similar and provided evidence for Fishburn's (1977) risk measure and Tversky and Kahneman's (1992) cumulative prospect theory. Banks above the target level tend to show risk aversion behavior, while the banks listed below tend to be risk-oriented. This finding provides evidence for the loss aversion bias and mental accounting.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:riibaf:v:45:y:2018:i:c:p:577-587
    DOI: 10.1016/j.ribaf.2017.07.111
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0275531917300971
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ribaf.2017.07.111?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hassan, M. Kabir, 1993. "The off-balance sheet banking risk of large U.S. commercial banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(1), pages 51-69.
    2. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    3. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128, Elsevier.
    4. Charnes, A. & Cooper, W. W. & Huang, Z. M. & Sun, D. B., 1990. "Polyhedral Cone-Ratio DEA Models with an illustrative application to large commercial banks," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 73-91.
    5. Koehn, Michael & Santomero, Anthony M, 1980. "Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-1244, December.
    6. 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.
    7. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    8. Agusman, Agusman & Monroe, Gary S. & Gasbarro, Dominic & Zumwalt, J.K., 2008. "Accounting and capital market measures of risk: Evidence from Asian banks during 1998-2003," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 480-488, April.
    9. Blair, Roger D & Heggestad, Arnold A, 1978. "Bank Portfolio Regulation and the Probability of Bank Failure: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(1), pages 88-93, February.
    10. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
    11. Drake, Leigh & Hall, Maximilian J. B., 2003. "Efficiency in Japanese banking: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 891-917, May.
    12. Fiegenbaum, Avi, 1990. "Prospect theory and the risk-return association : An empirical examination in 85 industries," Journal of Economic Behavior & Organization, Elsevier, vol. 14(2), pages 187-203, October.
    13. James G. March & Zur Shapira, 1987. "Managerial Perspectives on Risk and Risk Taking," Management Science, INFORMS, vol. 33(11), pages 1404-1418, November.
    14. Mester, Loretta J., 1996. "A study of bank efficiency taking into account risk-preferences," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1025-1045, July.
    15. Nafis Alam & Kin Boon Tang, 2012. "Risk‐taking behaviour of Islamic banks: application of prospect theory," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 4(2/3), pages 156-164, August.
    16. Sealey, C W, Jr, 1983. "Valuation, Capital Structure, and Shareholder Unanimity for Depository Financial Intermediaries," Journal of Finance, American Finance Association, vol. 38(3), pages 857-871, June.
    17. Nicholas C. Barberis, 2013. "Thirty Years of Prospect Theory in Economics: A Review and Assessment," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 173-196, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Huang, Jia & Chen, Zheng, 2021. "Optimal risk asset allocation of a loss-averse bank with partial information under inflation risk," Finance Research Letters, Elsevier, vol. 38(C).
    2. Ooi, Chai-Aun & Setiawan, Doddy & Hooy, Chee-Wooi, 2021. "Muslim CEOs and bank risk-taking: Evidence from Indonesia," Global Finance Journal, Elsevier, vol. 50(C).
    3. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Stefan Schiller, 2017. "The Quest for Rationality: Chief Financial Officers’ and Accounting Master’s Students’ Perception of Economic Rationality," SAGE Open, , vol. 7(2), pages 21582440177, April.
    3. 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.
    4. Eric J. Allen & Patricia M. Dechow & Devin G. Pope & George Wu, 2017. "Reference-Dependent Preferences: Evidence from Marathon Runners," Management Science, INFORMS, vol. 63(6), pages 1657-1672, June.
    5. Yousra Trichilli & Hana Kharrat & Mouna Boujelbène Abbes, 2021. "Prospect theory and risk-taking behavior: an empirical investigation of Islamic and conventional banks," Journal of Asset Management, Palgrave Macmillan, vol. 22(3), pages 163-178, May.
    6. Enrico G. De Giorgi & David B. Brown & Melvyn Sim, 2010. "Dual representation of choice and aspirational preferences," University of St. Gallen Department of Economics working paper series 2010 2010-07, Department of Economics, University of St. Gallen.
    7. repec:cup:judgdm:v:16:y:2021:i:6:p:1324-1369 is not listed on IDEAS
    8. Andrea C. Hupman & Jay Simon, 2023. "The Legacy of Peter Fishburn: Foundational Work and Lasting Impact," Decision Analysis, INFORMS, vol. 20(1), pages 1-15, March.
    9. Massimiliano Caporin & Luca Corazzini & Michele Costola, 2014. "Measuring the Behavioral Component of Financial Fluctuations: An Analysis Based on the S&P 500," CREATES Research Papers 2014-33, Department of Economics and Business Economics, Aarhus University.
    10. Schade, Christian & Steul, Martina & Schröder, Andreas, 2002. "Starting points' effects on risk-taking behavior," SFB 373 Discussion Papers 2002,15, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    11. Eduard Marinov, 2017. "The 2017 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 117-159.
    12. Francisco Rosas & Mariana Sans & Santiago Arana, 2018. "The effect of irrigation on income volatility reduction: a prospect theory approach," Documentos de Investigación 118, Universidad ORT Uruguay. Facultad de Administración y Ciencias Sociales.
    13. Sudeep Bhatia & Graham Loomes & Daniel Read, 2021. "Establishing the laws of preferential choice behavior," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 16(6), pages 1324-1369, November.
    14. Arvanitis, Stelios & Scaillet, Olivier & Topaloglou, Nikolas, 2020. "Spanning analysis of stock market anomalies under prospect stochastic dominance," Working Papers unige:134101, University of Geneva, Geneva School of Economics and Management.
    15. Arjun Chatrath & Rohan A. Christie‐David & Hong Miao & Sanjay Ramchander, 2019. "Losers and prospectors in the short‐term options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(6), pages 721-743, June.
    16. Rosas, Juan Francisco & Sans, Mariana & Arana, Santiago, 2017. "Quantifying the Benefits of Supplemented Irrigation due to Less Volatile Yields: A Prospect Theory Approach Applied to Summer Crops in Uruguay," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 259122, Agricultural and Applied Economics Association.
    17. Danny Zhao‐Xiang Huang, 2022. "Environmental, social and governance factors and assessing firm value: valuation, signalling and stakeholder perspectives," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1983-2010, April.
    18. Philip Bromiley, 2009. "A Prospect Theory Model of Resource Allocation," Decision Analysis, INFORMS, vol. 6(3), pages 124-138, September.
    19. Jakusch, Sven Thorsten, 2017. "On the applicability of maximum likelihood methods: From experimental to financial data," SAFE Working Paper Series 148, Leibniz Institute for Financial Research SAFE, revised 2017.
    20. Kuhberger, Anton, 1998. "The Influence of Framing on Risky Decisions: A Meta-analysis," Organizational Behavior and Human Decision Processes, Elsevier, vol. 75(1), pages 23-55, July.
    21. Giannikos, Christos I. & Kakolyris, Andreas & Suen, Tin Shan, 2023. "Prospect theory and a manager's decision to trade a blind principal bid basket," Global Finance Journal, Elsevier, vol. 55(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:45:y:2018:i:c:p:577-587. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ribaf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.