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Explain why prospect theory predicts that security prices

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Reference no: EM13396964

Efficient securities market theory has long been under attack from behavioural finance, which draws on behavioural theories of investor behaviour to explain why security prices do not always behave as the economic theories of rational investing and market efficiency predict. These attacks have increased since the 2007-2008 security market meltdowns.

Required:

  1. Explain why prospect theory predicts that security prices will differ from their prices under efficient security markets theory. 
  2. Describe two accounting-related efficient securities market anomalies and explain why each is an anomaly. 
  3. The efficient securities market anomalies suggest that investors underreact to the full information content of financial statements. Choose one behavioural theory that predicts this underreaction and explain why it predicts underreaction. 
  4. Should accountants be concerned that the importance of financial reporting may decline if behaviourally biased investors do not use all the information in the financial statements? Explain.

Reference no: EM13396964

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