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The endowment effect changes the shape of the indifference curves substantially [41] Similarly, another study that is focused on the Strategic Reallocations for Endowment analyses how it is the case that economics's agents welfare could potentially increase if they change their endowment holding.
Loss aversion was also used to support the status quo bias in 1988, [9] and the equity premium puzzle in 1995. [10] In the 2000s, behavioural finance was an area with frequent application of this theory, [11] [12] including on asset prices and individual stock returns. [13] [14]
Researchers have traced the cause of the disposition effect to so-called "prospect theory", which was first identified and named by Daniel Kahneman and Amos Tversky in 1979. [3] Kahneman and Tversky stated that losses generate more emotional feelings which affect individual than the effects of an equivalent amount of gains.
The proponents of the traditional theories believe that "investors should just own the entire market rather than attempting to outperform the market". Behavioral finance has emerged as an alternative to these theories of traditional finance and the behavioral aspects of psychology and sociology are integral catalysts within this field of study ...
Prospect theory is a theory of behavioral economics, judgment and decision making that was developed by Daniel Kahneman and Amos Tversky in 1979. [1] The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics .
Reference dependence is a central principle in prospect theory and behavioral economics generally. It holds that people evaluate outcomes and express preferences relative to an existing reference point, or status quo. It is related to loss aversion and the endowment effect. [1] [2]
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Status quo bias has been attributed to a combination of loss aversion and the endowment effect, two ideas relevant to prospect theory.An individual weighs the potential losses of switching from the status quo more heavily than the potential gains; this is due to the prospect theory value function being steeper in the loss domain. [1]