The aim of this paper is to analyze bank’s risk-taking from a behavioral perspective. The paper addresses this issue through a special case: risk attitudes based on the prospect theory introduced by Kahneman and Tversky (1979) and Tversky and Kahneman (1992). According to this theory, agents usually underweigh the probable results compared to certain ones, which implies that agents are risk-averse when the gains are certain, and risk-seeking when losses are certain. In this respect, this paper analyzes the relationship between outcome variability and distance from target. Targets are defined as the median values of return variables. The results reveal that: in below target case, the results confirm the prospect theory; the distance from target is generally found to be negatively associated with the dispersion from the mean. In above target case also, the results do confirm the prospect theory; the distance from target is generally found to be positively associated with the dispersion from the mean.

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.

Behavioral Finance Journal, Asset Pricing, Contingent States, Capital Asset Pricing Model, Prospect Theory, Financial Literature, Bullish Market, Asymmetric Evaluation, Capital Asset Pricing Model, French Market, Political Crises, Asian Financial Crisis.