According to prospect theory,
A) investors have a propensity to sell winners too soon and hang on to losers too long.
B) investors ignore bad news and overemphasize good news.
C) investors tend to follow the herd.
D) investors put more money into a failure rather than into a success.
E) investors are all noise traders.

Question

Quizplus · Accepted Answer

Prospect theory suggests that investors have a tendency to sell their winning investments too early in order to lock in a profit and hold onto their losing investments too long in hopes of avoiding a loss. This behavior can be explained by the psychological factors of loss aversion and the endowment effect, which leads investors to overvalue their existing holdings and become risk-averse when it comes to potential losses.

According to Prospect Theory