Application of Prospect Theory in Forex Binary Options Trading

Abstract

A binary option is a transaction in which one chooses between two options, one higher or lower than a predetermined point in time, based on a prediction of the rise or fall of an exchange rate or other market. Although it appears to be a simple transaction, it is in fact a financial transaction based on a complex rationale and characterized by a high degree of volatility. This paper examines how prospect theory can be applied to binary options trading by comparing and analyzing the results of two subjects' trades.