Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/55191
Authors: 
Vinokur, Leon
Year of Publication: 
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

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