Role of Prospect Theory in an Insurance Company’sInvestment: A Behavioural Finance Study in Karnataka

Prospect Theory, a seminal theory in behavioural economics and finance, was developed by psychologists Daniel Kahneman and Amos Tversky in 1979. This theory serves as a fundamental framework for understanding decision-making under conditions of risk and uncertainty, a central focus of this study regarding investment decision-making in insurance companies. Behavioural finance, which studies how psychological factors influence financial decision-making, has significant implications for the insurance industry. With an emphasis on behavioural finance theories, this research paper investigates the part played by prospect theory in the investment choices made by insurance businesses active in the state of Karnataka. A key idea in behavioural finance is prospect theory, which looks at how people and organisations behave when faced with risk and uncertainty. The research paper seeks to identify specific behavioural biases, such as loss aversion and the disposition effect, which might affect investment choices in the insurance industry. To explore the psychological aspects of investment decisions, quantitative research techniques, including the Cronbach Alpha Test of reliability, are employed. The study develops, recommends, and validates a conceptual framework for investment decision-making, utilising a Structural Equation Model (SEM). The research offers a comprehensive exploration of investment decision-making within insurance companies, combining literature review, empirical analysis, quantitative research, and the development of a practical conceptual framework. The research spotlights the presence of specific psychological biases like amplified aversion to losses, a tendency to approach potential gains with caution, and a propensity for risk-seeking behaviour when faced with potential losses. It has been unveiled that insurance companies tend to adopt investment strategies that correlate with the principles of Prospect Theory. Social Implication: It seeks to provide useful insights to practitioners, policymakers, and academics interested in improving investment strategies and risk management in this field by bridging the gap between behavioural finance and the insurance industry.