Prospect theory frequently explains the empirical results of Bowman's paradox (negative relationship between risk and return). However, the empirical econometric model of these researches is misspecified. This study used a data-driven approach to improve the econometric model. Empirical results based on the improved econometric model are also reinforced by data visualization to be illustrated in depth. For this purpose, we used the data of 622 listed firms on the Pakistan Stock Exchange from 2000 to 2019. Our results contradict the literature on prospect theory based on the improved econometric model.
Keywords: Bowman’s paradox; Modeling nonlinear relationship; Prospect theory.
© The Author(s), under exclusive licence to Springer-Verlag GmbH Germany, part of Springer Nature 2022, Springer Nature or its licensor holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.