Prospect theory and narrow framing bias: Evidence from emerging markets

• Published in: The Quarterly review of economics and finance Vol. 80; pp. 90 - 101
• Main Authors: do Nascimento Junior, Arnaldo João, Klotzle, Marcelo Cabus, Brandão, Luiz Eduardo T., Pinto, Antonio Carlos Figueiredo
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01-05-2021; Elsevier Advanced Technology Publications
• Subjects: Business schools; Developing countries; Emerging markets; Narrow framing bias; Probability weighting function; Prospect theory; Stock returns; Prospect theory; G41; G11; Emerging markets; G12; Stock returns; Probability weighting function; Narrow framing bias
• ISSN: 1062-9769; 1878-4259
• DOI: 10.1016/j.qref.2021.01.016

•We analyze the narrow framing bias in investment decisions in emerging countries.•We empirically identify the predictive power of prospect theory for stock returns.•The probability weighting function is the most critical factor.•The relationship is different depending on the country.•Cultural factors may influence the relationship.
Using prospect theory, we analyzed the narrow framing bias in investment decisions in certain emerging countries: Brazil, China, Russia, Mexico and South Africa. In all cases, we empirically identified the predictive power of prospect theory for stock returns. We also found that the probability weighting function is the most important factor in this predictive power. The relationship between prospect theory and stock returns is different in each country and may be influenced by factors associated with cultural aspects.