Extending the Prospect Theory: Analysis of Animal Spirits and Consecutive Gambles in the Decision-Making Process

Abstract

The aim of this dissertation is to extend the prospect theory, developed by
psychologists Amos Tversky and Daniel Kahneman. In this paper, the impact
of animal spirits (rival‘s purchasing price, regret, doubtful information, and
expectations) and the influence of consecutive gambles on the reference
point adaptation are investigated.
The core element of this thesis is the empirical experiment based on
the direct approach survey. The questionnaire is composed of three parts,
representing different types of hypotheses that need to be verified. The
first part consists of a multiple choice questions, which prove that prospect
theory indeed works in practice. In the second part, participants are asked
to indicate the utility maximizing price of a certain asset. This part shows
that the highest reference point adaptation was achieved by participants in
the treatment of high rival‘s purchasing price. Another important finding of

this experiment is that individuals tend to indicate the highest value of their
expectations as the utility maximizing price and do not state values exceeding
expectations. The third part of the questionnaire is a multistage lottery in
which participants choose among several gambling alternatives. A significant
tendency was noticed during this experiment: the reference point adapts
faster among individuals facing consecutive losses than among those facing
consecutive gains. Longer time is thus needed for reference point to adjust
when consecutively winning than when consecutively losing.