An Adaptive Prospect Theory View of Market References

Abstract

This chapter considers investors' susceptive (S), proactive (P), reactive (R), and mindful (M) attitudes for the SPRM efficient portfolio. It offers an adaptive prospect theory (APT) view of decision choices that incorporates behavioral biases and noises. With use of NARDL models, in explaining returns of the sample stocks listed in the NSE Nifty from 2000 to 2019, the study incorporates positive and negative effects of the decision references like risk-free return and systematic risk along with endogenous return variables. It explains investors' behavioral biases at susceptive, reactive, and mindful attitudes at stable, unstable, and adaptive market spectrums. The GARCH effects at the empirical GARCH-X augmentation of the NARDL model show the presence of noise and its impacts in terms of proactive effects in the decision choices. With investors' episodic journey over the stable, unstable, and adaptive stock markets, the author contributes towards developing the SPRM framework. Investors' inter-temporal adaptation across biases and the limited sample size limit the generalizability of the study.