Honors Program Theses

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Open Access Honors Program Thesis

First Advisor

Steven Johnson

Abstract

We continually need to make decisions, but it is clear that, in so doing, we do not act in accordance with strict rules of rationality. For example, the effect of framing (i.e. the choice of particular words to present a given set of facts) can influence our choices, which raises some serious questions about our real freedom of choice. An increasing body of literature on framing supports a tendency for people to take more risks when seeking to avoid losses as opposed to securing gains. This is explained by framing and the value function within Tversky and Kahneman's (1981) prospect theory. An empirical study was undertaken within UNI's College of Business to test the hypothesis that framing influenced subjects' choices when presented with two pairs of financial decisions (Problem 1 vs. Problem 2) as indicated above. In addition, pairs of financial decisions with equal expected values were presented in order to determine the level of risk aversion expressed by business students at UNI. The results, based on a sample of 80 adults, supported the hypotheses that the framing of financial investments influences the financial decisions made by participants and that investors act in accordance with the prospect theory (i.e. loss-aversion theory). Such findings challenge the idea of a "rational" investor and might require serious alterations in the future to the core assumptions of economic theory.

Year of Submission

2006

Department

Department of Finance

University Honors Designation

A thesis submitted in partial fulfillment of the requirements for the designation University Honors

Date Original

12-2006

Object Description

1 PDF file (51 pages)

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