A Behavioural Approach To Financial Puzzles
AbstractMany financial puzzles have been solved, at least partially, by the introduction of alternative assumptions on the behaviour of investors. Cumulative prospect theory and mental accounting are two such approaches which are used in this paper to analyze some of the most important financial puzzles. We first focus our attention on anomalies (or considered as such in the standard expected utility model) at the individual level, for example the disposition effect or the low diversification puzzle. We then address two aggregate puzzles, namely the equity premium puzzle and the return predictability puzzle. We show how recent behavioral models allow to explain these anomalies in a very natural way.
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Bibliographic InfoPaper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2008-01.
Date of creation: 2008
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-01 (All new papers)
- NEP-CBE-2008-03-01 (Cognitive & Behavioural Economics)
- NEP-PKE-2008-03-01 (Post Keynesian Economics)
- NEP-UPT-2008-03-01 (Utility Models & Prospect Theory)
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