Many researches have been done analyzing the main factors affecting the bank’s risktaking
decisions. In the traditional finance models that focus on perfect information and
coherent beliefs, many determinants are capable of explaining the excessive risk-taking,
inadequate bank capital regulation (Kahane, 1977; Koehn and Santomero, 1980; Kim and
Santomero, 1988; and Shrieves and Dahl, 1992), inefficient corporate governance
mechanisms (Saunders et al., 1990; Knopf and Teall, 1996; Dolbe and Knoph, 2006; and
Shams, 2009), increase of market competition (Keeley, 1990; Cordella and Yeyati, 2002;
Jimenez et al., 2008; and Martinez-Miera and Repullo, 2008), and institutional and legal
environments (La Porta et al., 1997, 1998 and 2000; and Barth et al., 1999). All these
factors do not consider the fact that bank risk-taking decisions are also based on human
subjective judgement and this opposes the individual rationality hypothesis. So, the
behavioral perspective can also be another factor which affects the bank risk-taking
decisions. In the behavioral finance models that are based on cognitive psychology, many
factors determine the excessive risk taking, risk perception, risk attitudes and beliefs
((over)optimism, (over)confidence). In this case, the main factor that explains trading
behavior is the manager’s risk attitude and preference when handling risky decisions. The
prospect theory is one of such theories. In reference to the prospect theory as suggested
by Kahneman and Tversky (1979), below target or aspiration levels, the decision makers
become less risk-averse and even more risk-seeking. Therefore, this paper aims to analyze
the behavioral perspective to better understand the judgement of the manager when
handling risky decisions and particularly to determine whether the prospect theory can
explain the bank’s risk-taking decisions. So, the two main features of this research are:
first, the application of behavioral finance features to explain that the determinants of bank’s risk-taking decisions have received little attention in the literature. Second, we
notice this gap in the literature, especially in the case of Tunisian banking industry.
Therefore, the core aim of this research is to fill this gap. This paper is organized in the
following manner: the introduction is followed by a brief literature review; subsequently,
the methodology used is described, and the empirical results obtained are discussed; and
finally, the conclusion is offered.
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