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http://hdl.handle.net/10419/55191
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| Title: | | Evaluation with dynamic reference: Sustainable investment  |
| Authors: | | Vinokur, Leon |
| Issue Date: | | 2009 |
| Series/Report no.: | | Working Paper // School of Economics and Finance, Queen Mary, University of London 651 |
| Abstract: | | The Prospect Theory proposes to assess outcomes relative to a reference point (or benchmark). Although the literature recognises the relevance of dynamic benchmarks, most of the applications of Prospect Theory employ static reference points (or a status quo). This paper aims to develop a Prospect Theory framework for investment under uncertainty subject to a dynamic reference point, within the context of environmental policy making, where the distinction between a dynamic and a static frameworks is crucial. I evince that, in contrast to the static framework, in a dynamic framework the investor measures not only the absolute but also the relative risk premium (Sharpe ratio) of the investment opportunity, incorporating the risks and returns of a reference portfolio. I propose that there exists a relation between static and dynamic frameworks. Using the dynamic framework, I argue that in the environmental context international co-operation is the key to a successful environmental policy. |
| Subjects: | | prospect theory dynamic reference sustainable development |
| JEL: | | D46 G18 Q58 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Working Paper Series, School of Economics and Finance, Queen Mary, University of London
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