Study reveals how investor preferences drive market volatility and contrarian behavior
Prospect theory shows how people make decisions based on potential gains and losses. This study found that these preferences can lead investors to trade in a way that goes against the market trend. By looking at how different types of investors interact, the researchers showed that prospect-theory investors tend to act as contrarian traders, buying when others are selling and vice versa. This behavior can help explain why markets sometimes show unexpected patterns, like sudden changes in prices.