Modeling household behavior under prospect theory type preferences

Project Lead: Jaroslava Hlouskova
Duration: January 2016 – April 2022
Funding: FWF Project

The aim of this research project is to model a number of household's decisions under prospect theory type preferences and to examine in addition a household’s behavior under different tax policies. The topic of this research belongs to the (interdisciplinary) field of behavioral economics where in addition to rationality (the core assumption of the main stream expected utility theory) also some psychological aspects are taken into account. These to some extent contribute to the explanation of some phenomena in financial markets which could not be justified by the traditional expected utility theory, such as: the endowment effect, the equity premium puzzle, the disposition effect (the tendency of investors to sell stocks whose price has increased too soon, while keeping assets that have dropped in value too long – a feature observed in the late financial crises), and widely popular insurance portfolios.