Prospect theory and narrow framing bias: Evidence from emerging markets

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. (c) 2021 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.

Automated summary

Using prospect theory, narrow framing bias in investment decisions in emerging countries such as Brazil, China, Russia, Mexico, and South Africa were analyzed. The empirical study identified the predictive power of prospect theory for stock returns, with the probability weighting function as the most important factor. The relationship between prospect theory and stock returns differs by country and may be influenced by cultural factors.