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Abstract:
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This thesis presents an attempt to resolve the well-known equity premium puzzle using insight from behavioural finance – namely prospect theory and the concept known as myopic loss aversion. The notion is that the reason why economist have had such a hard time reconciling the predictions of standard expected utility theory to real world observations is that decision makers do not behave as suggested by the standard normative model. Rather a new descriptive theory is warranted since decision makers in their behaviour are observed to violate vital assumptions underlying utility maximisation |
