Forecasting Investors Trading Behavior: Evidence from Prospect Theory

In this study, relation between trading gain- loss and price logarithm as measure of utility examined by Prospect theory. With Ex post facto study in Field of behavioral finance and using of observational data of price and trading gain/loss, sample firms classified in two group and relationship between price logarithm and trading gain/loss is estimated. Results show that first, positive relation exists between trading gain and price logarithm, while this relation for trading loss is negative. Second, slope coefficient in loss side relative to gain side in terms of absolute value is larger that show investor have high sensitivity to loss relative to gain. In other words, investors are risk averse in gain side and loss averse in loss side. Thus, estimated models show that in accordance with Prospect Theory, when investors are in gain, they have risk aversion bias and when they are in loss, they have loss aversion bias. This result is not rejected by nonlinear estimation. Nonlinear results show slope coefficient decrease by increasing gain and loss.