Environmental Policy and Bounded Rationality.
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The Prospect Theory proposes to assess outcomes relative to a reference point (or
benchmark). Although the literature recognises the relevance of dynamic benchmarks,
most of the applications of Prospect Theory employ static reference points (or a status
quo). This paper aims to develop a Prospect Theory framework for investment under
uncertainty subject to a dynamic reference point, within the context of environmental
policy making, where the distinction between a dynamic and a static frameworks is
crucial. I evince that, in contrast to the static framework, in a dynamic framework
the investor measures not only the absolute but also the relative risk premium (Sharpe
ratio) of the investment opportunity, incorporating the risks and returns of a reference
portfolio. I propose that there exists a relation between static and dynamic frameworks.
Using the dynamic framework, I argue that in the environmental context international
co-operation is the key to a successful environmental policy
Authors
Vinokur, LeonCollections
- Theses [4495]