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Salience and Asset Prices

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  • Pedro Bordalo
  • Nicola Gennaioli
  • Andrei Shleifer

Abstract

We present a simple model of asset pricing in which payoff salience drives investors' demand for risky assets. The key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets. The model accounts for several puzzles in finance in an intuitive way, including preference for assets with a chance of very high payoffs, an aggregate equity premium, and countercyclical variation in stock market returns.

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Bibliographic Info

Paper provided by Harvard University OpenScholar in its series Working Paper with number 69726.

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Handle: RePEc:qsh:wpaper:69726

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  1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  2. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Consumer Choice," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 803 - 843.
  3. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  4. Nicholas C. Barberis, 2013. "Thirty Years of Prospect Theory in Economics: A Review and Assessment," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 173-96, Winter.
  5. Nicholas Barberis & Ming Huang, 2008. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," American Economic Review, American Economic Association, vol. 98(5), pages 2066-2100, December.
  6. Brian Boyer & Todd Mitton & Keith Vorkink, 2010. "Expected Idiosyncratic Skewness," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 169-202, January.
  7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  8. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
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Cited by:
  1. Thomas M. Eisenbach & Martin C. Schmalz, 2013. "Up close it feels dangerous: 'anxiety' in the face of risk," Staff Reports 610, Federal Reserve Bank of New York.

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