Behavioral explanation for risk taking in Islamic and conventional banks

The objective of this paper is to provide a behavioral explanation for risk taking in Islamic and conventional banks. Within the prospect theory framework; we consider the bias of loss aversion and mental accounting to explain the risk behavior in Islamic and conventional banks in the MENA region. We use the Fishburn's (1977) risk measure and the Kendall's t to test the prospect theory predictions. Several measures of performance and risk are used as target level. The results for the two types of banks are too similar and provided evidence for Fishburn's (1977) risk measure and Tversky and Kahneman's (1992) cumulative prospect theory. Banks above the target level tend to show risk aversion behavior, while the banks listed below tend to be risk-oriented. This finding provides evidence for the loss aversion bias and mental accounting.