Behavioral aspects of investment decision-making under uncertainty: analysis through the lens of prospect theory

Анотація

This study provides an expanded and integrative analysis of behavioral determinants of investment decision-making under conditions of uncertainty, grounded in the conceptual framework of Kahneman and Tversky’s prospect theory. The research systematizes the evolution of behavioral finance from its foundational assumptions to contemporary empirical developments, emphasizing the transition from expected utility theory to cumulative prospect theory (CPT). Particular attention is devoted to the formal structure of CPT, including the S-shaped value function, asymmetric loss aversion, nonlinear probability weighting, and the endogenous formation of reference points that shape investor perception of gains and losses. The paper identifies and classifies core cognitive biases influencing financial behavior—loss aversion, the disposition effect, overconfidence, anchoring, herding behavior, and mental accounting—demonstrating their systemic interaction within real-world market environments. Drawing on empirical findings, the study explains major market anomalies through the prism of prospect theory, including the equity premium puzzle, momentum and reversal patterns, excess volatility, and speculative bubble formation. Recent international evidence (2019–2025) is critically synthesized, including large-scale cross-country replications of prospect theory confirming the robustness of its predictions, behavioral distortions observed during the COVID-19 crisis, bias amplification in cryptocurrency markets, and insights from neurofinance regarding neural correlates of risk perception. A distinct contribution of the article lies in incorporating the Ukrainian context, analyzing investor reactions under martial law, heightened macroeconomic instability, and structural market transformation. The study develops practical implications focused on debiasing mechanisms, behavioral nudging, AI-driven decision-support tools, and institutional design aimed at enhancing financial resilience. The results contribute to a deeper theoretical understanding of bounded rationality and provide applied recommendations for improving the quality of investment decisions in turbulent economic systems.

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