MANAGERIAL DECISION MAKING UNDER RISK IN COMMERCIAL BANKS: AN APPLICATION OF PROSPECT THEORY ON BANKS IN BOSNIA AND HERZEGOVINA

MANAGERIAL DECISION MAKING UNDER RISK IN COMMERCIAL BANKS: AN APPLICATION OF PROSPECT THEORY ON BANKS IN BOSNIA AND HERZEGOVINA

Halaba, Amra

The main objective of this research is to investigate behavioral factors in the managerial decision making under risk in commercial banking from the perspective of the basic theory in behavioral finance – the prospect theory. The study is important in that it contributes to the development of a comprehensive risk management approach in banking industry, by broadening already existing practices with behavioral finance findings, as summarized through the prospect theory. The theory explains the decision making processes, holding that managers become more risk seeking as their bank moves further below the specified targets and more risk seeking as their bank moves further above the specified targets. The theory is examined on the case of B&H banks from 1999 to 2015, in the light of returns on assets, returns on equity and capital ratio. Analyses show risk seeking among managers of banks below targets, whereas there is no evidence for risk aversion among managers of banks above target. Therefore, the prospect-theory-based model of managerial decision making offered in this research is suitable ground-basis to ingrain the behavioral insights into risk management processes in the banking industry of Bosnia and Herzegovina. Keywords: Prospect Theory, Decision Making, Risk, Commercial Banking, Bosnia and Herzegovina.

Thesis
NonPeerReviewed

2016

3605