Experimental evidence of Prospect Theory within a project-financing context

Purpose The study investigates the effects of Prospect Theory’s loss aversion within the context of project financing. Design/methodology/approach The study makes use of a balanced paired comparison best/worst scaling (PCBWS) experimental design method. It has not been used in prior Prospect Theory studies and provides increased internal validity compared to other ranking methods by eliminating transitive assumptions. Findings The results show that within the context of project-financed investments, the difference between the predictions of Expected Utility Theory (EUT) and Prospect Theory can be explained by Prospect Theory’s loss aversion. As anticipated, loss aversion decreases as expected utility increases. Originality/value (1) This paper investigates Prospect Theory’s loss aversion within the context of a very specific, but very large, market that has not yet been studied in Prospect Theory literature – the $200+ bn annual global market for project finance. (2) It finds experimental confirmation of Prospect Theory’s loss aversion using a quantitative method (PCBWS) not used in prior Prospect Theory research. Furthermore, PCBWS eliminates transitive assumptions to increase validity.