Development of a Behavioral Performance Measure

Authors

  • Marcelo Cabus Klotzle Pontifícia Universidade Católica do Rio de Janeiro
  • Leonardo Lima Gomes Pontifícia Universidade Católica do Rio de Janeiro
  • Luiz Eduardo Teixeira Brandão Pontifícia Universidade Católica do Rio de Janeiro
  • Antonio Carlos Figueiredo Pinto Pontifícia Universidade Católica do Rio de Janeiro

DOI:

https://doi.org/10.12660/rbfin.v10n3.2012.4080

Keywords:

Behavioral Finance, Prospect Theory, Performance Measure

Abstract

Since the fifties, several measures have been developed in order to measure the performance of investments or choices involving uncertain outcomes. Much of these measures are based on Expected Utility Theory, but since the nineties a number of measures have been proposed based on Non-Expected Utility Theory. Among the Theories of Non-Expected Utility highlights Prospect Theory, which is the foundation of Behavioral Finance. Based on this theory this study proposes a new performance measure in which are embedded loss aversion along with the likelihood of distortions in the choice of alternatives. A hypothetical example is presented in which various performance measures, including the new measure are compared. The results showed that the ordering of the assets varied depending on the performance measure adopted. According to what was expected, the new performance measure clearly has captured the distortion of probabilities and loss aversion of the decision maker, ie, those assets with the greatest negative deviations from the target were those who had the worst performance.

Author Biography

Marcelo Cabus Klotzle, Pontifícia Universidade Católica do Rio de Janeiro

Ph.D em economia pela Katholische Universität Eichstätt (Alemanha) É professor do IAG (Departamento de Administração) da PUC-Rio na área de Finanças e Economia

Published

17-10-2012