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A Behavioural Approach To Financial Puzzles

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  • Marie-Hélène Broihanne
  • Maxime Merli
  • Patrick Roger

    (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)

Abstract

Many 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.

Suggested Citation

  • Marie-Hélène Broihanne & Maxime Merli & Patrick Roger, 2008. "A Behavioural Approach To Financial Puzzles," Working Papers of LaRGE Research Center 2008-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2008-01
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    References listed on IDEAS

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