| Title |
Prospect Theory and Risk Preferences of Real Estate Development Companies |
| Authors |
Kim, Byungil ; Kim, Won Tae ; Chung, Do-Bum |
| DOI |
https://dx.doi.org/10.6106/KJCEM.2022.23.1.083 |
| Keywords |
Decision Making; Prospect Theory; Loss Aversion; Risk Preference; Return on Equity |
| Abstract |
Companies make decisions with risks such as choosing an investment plan in order to pursue profits. This study explained the decision making of the management of construction companies in South Korea using the tendency to avoid losses in the Prospect Theory. To this end, 20-year financial data of 2,881 companies engaged in real estate development, which have to bear the greatest risk among the construction industry, were collected. The collected companies were roughly classified based on the reference point, and the causal relationship between average return on equity and risk preference by group was empirically analyzed through regression analysis. As a result, it was confirmed that if the average return on equity of a company decreases for the group above the reference point, it tends to select an investment plan with low uncertainty in order not to lose additional money. In addition, it was confirmed that if the average return on equity of a company decreases for the group below the reference point, it tends to select an investment plan with high uncertainty to move to the profit area. This result is exactly consistent with the loss aversion tendency of the Prospect Theory. |