William Hakes- Management Science Article Summary II



1)      “Prospect Theory, Mental Accounting, and Differences in Aggregated and Segregated Evaluation of Lottery Portfolios.” Management Science; 2001 INFORMS; Langer, Thomas and Martin Weber. Volume 47 Issue 5, pp. 716-733.

2)      Thomas Langer and Martin Weber. Universität Mannheim.  langer@bank.bwl.uni-mannheim.de & weber@bank.bwl.uni-mannheim.de

3)      When presented with two different portfolio lotteries, one aggregated and the other segregated, do individuals prefer one versus the other (solely by virtue of the method of presentation)?

4)      Basic Statistical:  In this article, the authors advance the existing idea of “prospect theory” and its implications for how individuals choose in different circumstances. 

5)      Kahneman, Tversky, and others developed prospect theory, a somewhat competing idea to utility theory demonstrating that individuals are at best boundedly rational and loss averse.  Further research has suggested that individuals will generally choose between identical lotteries when the lotteries are shown as entire distributions rather than a series of gambles.  This article suggests that this is true, but only at certain levels along the value function.  Specifically, they found that under small probabilities of very large losses, as in the case of a bank loan setting (where the bank faces a small probability of large individual default), segmented portfolios are preferred to aggregated portfolios.  Their experiments provide the basis for further research into how individuals evaluate more complex lotteries.

6)      This article would likely appeal to a wide variety of readers, from academics in management, economics, finance, as well as practitioners in these same areas.  It has implications for how portfolios should be framed, either “accurately” or “opportunistically”.

7)      I am currently working on a paper with similar theoretical concerns as this.  Furthermore, my dissertation will likely include this subject matter as it relates to specific investment portfolios.  Hopefully, the experimental portion of my paper will examine the value function, as the authors suggest, in more complex lotteries.