![Prospect theory and liquidation decisions [An article from: Journal of Economic Theory]](http://ecx.images-amazon.com/images/I/41S14MH1ATL.jpg)
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This digital document is a journal article from Journal of Economic Theory, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
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We solve a liquidation problem for an agent with preferences consistent with the prospect theory of Kahneman and Tversky [Econometrica 47 (1979) 263-291]. We find that the agent is willing to hold a risky project with a relatively inferior Sharpe ratio if the project is currently making losses, and intends to liquidate it when it breaks even. On the other hand, the agent may liquidate a project with a relatively superior Sharpe ratio if its current profits rise or drop to the break-even point. Our results capture the spirit of the disposition effect and the break-even effect documented in empirical and experimental studies.
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