Prospect Theory and Capital Investment Decisions

Implications of "Prospect Theory" posits a contrary approach to conventional finance with regard to behavioural aspects of individuals with regard to their attitude towards risk. According to this theory, individuals while making their investments decisions are not all the times risk averse. Their attitude towards risk changes, depending upon their situation of being in gain or loss domain. When, they will be gaining from their existing investments, they will become risk averse and whenever, they will be in the losing domain, they will become risk seekers. Further, this gain or loss will be calculated relative to a reference point. Prospect Theory is widely recognized as an important theory in the field of Behavioural Finance. In this book, an effort has been made to develop a nexus between behavioural finance and corporate finance by establishing a link of this theory in long term investment decisions of the corporate managers in firms, which is one of the areas of the corporate finance.It has helped to highlight the existence of irrationality involved in their decisions due to various behavioural aspects and controlling such behavioural issues for making rational decisions.