Prospect Theory and Measurement on Crowd’s Subjective Behaviors in Trading

We measure crowd’s decision weights in trading by trading volume distribution and determine a reference price about crowd’s assessment value of an individual stock by the maximum volume price in stock market. We examine a reference-dependent preferences hypothesis in trading by two sets of explicit trading volume distribution models, which are connected to an explicit S-shaped value function in prospect theory. It is true with 82.42% in our tests, using high frequency data in China stock market. We explain the patterns of volume distribution by four behavioral features: mental accounting, disposition, decision weight, and coherence or agreement. Moreover, crowd’s traders update a reference price about the assessment value of an individual stock in jump from time to time. It takes place about 11.92% on a trading day. The measure of subjective behaviors by a volume dimension suggests the new openings of asset pricing models and test methodologies in financial economics.