Cumulative Prospect Theory and Radner Theory: A Critical Assessment from Nigeria

Abstract

Aims: This study undertook a critical comparative assessment of cumulative prospect theory and Radner theory. The aim is to examine investors’ behavior in the financial market using these theories. The specific objectives of the study were to examine if there are similarities between the cumulative prospect theory and Radner theory; ascertain the implications of the cumulative prospect theory to financial market; find out the implications of the Radner theory to financial market; and assess the drawbacks of the cumulative prospect a’’nd Radner theories. Methodology: The study used the desk top library research approach’’ to survey relevant extant literatures on investors’ behaviour in relation to cumulative prospect theory and Radner’’ theory in a comparative manner. Results: Findings indicate that investors’ behaviour in investment/consu’’mption decision making is predicated on attitude to risk/uncertainty. They prefer higher return to lower risk; higher ‘’satisfaction from commitment of wealth to asset bundle under condition of general equilibrium. These behavioural dispositions have been observed and addressed in the cumulative prospect theory and Radner theory. The finding of this study is that the cumulative prospect and Radner theories serve as the barometers with which investors’ direction of investments are constantly monitored in the stock market globally. Recommendation: This study therefore recommends that financial analysts and market participants should frequently combine the rudiments of the traditional finance and behavioural finance in analyzing investments as well as observing reactions of myriad competing investors, particularly in perfect markets or in incomplete markets.

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