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Finance and Credit
 

Prospect theory cost function in Russian practice

Vol. 23, Iss. 46, DECEMBER 2017

PDF  Article PDF Version

Received: 30 October 2017

Received in revised form: 13 November 2017

Accepted: 27 November 2017

Available online: 14 December 2017

Subject Heading: THEORY OF FINANCE

JEL Classification: C9, C92, D81, D90, G02

Pages: 2762–2776

https://doi.org/10.24891/fc.23.46.2762

Bogatyrev S.Yu. Financial University under Government of Russian Federation, Moscow, Russian Federation
sbogatyrev@fa.ru

Importance This article discusses the issues of empirical confirmation of the cost function graph that underlies the Prospect theory.
Objectives The article aims to offer practical tools for measuring values and how to take them into account when constructing a cost function in Prospect theory, using real market data.
Methods For the study, I used the methods of correlation and regression analysis.
Results The article presents a designed cost function graph, the constituent elements of which are logically justified in accordance with behavioral finance.
Conclusions and Relevance The resulting form of the real cost function graph resembles the indifference curves opened in the nineteenth century. The resulting graphs update the old economic theory and prove the need to confirm the new theories with real empirical evidence. The results obtained can be helpful to financial practitioners, analysts, business valuators, etc.

Keywords: cost function, prospect theory, mergers and acquisitions, behavioral discount rate, behavioral finance, cash flow discounting

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