The effect of prior performance of investors on stock price based on Prospect theory

Subject Areas : Journal of Investment Knowledge

Mohammad  Kaffash Panjeshahi ¹ (Ph.D. in financial management , Faculty of Management and Accounting, Allameh Tabataba'i University, Tehran, Iran. (Corresponding Author ))
Farrokh  Barzideh ² (Assistant Professor., Accounting, Faculty of Management and Accounting, Allameh Tabataba'i University, Tehran, Iran)

Received: 2017-04-28 Accepted : 2017-08-17 Published : 2017-10-23

Keywords: Utility, Behavioral Finance, Prospect theory, loss aversion, House money effect,

Abstract :

In this article utility of investors contains utility from consumption and utility from fluctuations in their investments. To prove the effect of prior performance of investors on stock price first the utility function was defined based on Prospect theory and variables relating to prior outcomes and loss aversion were factored into utility function and then price equations were defined. In the other form, variables relating to prior performance in utility function were removed and price equations were defined. Next, the P/D ratio and logarithmic growth of stock prices were simulated in both forms and compared against real market data. By utilizing ANOVA and K-Means in the 1381-1393 period, it became clear that the mean and standard deviation in the first form are closer to real market data than those of the second form, meaning that removing variables relating to investors' prior returns from the utility function resulted in weaker estimates, the effect of prior investment performance of investors was confirmed

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