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A Behavioural Approach To Financial Puzzles

  • Marie-Hélène Broihanne
  • Maxime Merli
  • Patrick Roger

    ()

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

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.

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Paper 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.

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Date of creation: 2008
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Handle: RePEc:lar:wpaper:2008-01
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  4. Annette Vissing-Jorgensen, 2002. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," NBER Working Papers 8884, National Bureau of Economic Research, Inc.
  5. De Giorgi, Enrico & Hens, Thorsten, 2005. "Making Prospect Theory Fit for Finance," Discussion Papers 2005/19, Department of Business and Management Science, Norwegian School of Economics.
  6. 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.
  7. Ferris, Stephen P & Haugen, Robert A & Makhija, Anil K, 1988. " Predicting Contemporary Volume with Historic Volume at Differential Price Levels: Evidence Supporting the Disposition Effect," Journal of Finance, American Finance Association, vol. 43(3), pages 677-97, July.
  8. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
  9. Mark Grinblatt & Bing Han, 2001. "Prospect Theory, Mental Accounting, and Momentum," Yale School of Management Working Papers amz2533, Yale School of Management, revised 01 May 2007.
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  12. Camerer, Colin & Babcock, Linda & Loewenstein, George & Thaler, Richard, 1996. "Labor Supply of New York City Cab Drivers: One Day At A time," Working Papers 960, California Institute of Technology, Division of the Humanities and Social Sciences.
  13. Marie-Hélène Broihanne & Maxime Merli & Patrick Roger, 2006. "Théorie comportementale du portefeuille. Intérêt et limites," Revue économique, Presses de Sciences-Po, vol. 57(2), pages 297-314.
  14. Doron Avramov & Tarun Chordia, 2006. "Asset Pricing Models and Financial Market Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 1001-1040.
  15. Nielsen, Lars Tyge, 1985. " Attractive Compounds of Unattractive Investments and Gambles," Scandinavian Journal of Economics, Wiley Blackwell, vol. 87(3), pages 463-73.
  16. Grinblatt, Mark & Moskowitz, Tobias J., 2004. "Predicting stock price movements from past returns: the role of consistency and tax-loss selling," Journal of Financial Economics, Elsevier, vol. 71(3), pages 541-579, March.
  17. Shefrin, Hersh M. & Statman, Meir, 1984. "Explaining investor preference for cash dividends," Journal of Financial Economics, Elsevier, vol. 13(2), pages 253-282, June.
  18. Lesmond, David A. & Schill, Michael J. & Zhou, Chunsheng, 2004. "The illusory nature of momentum profits," Journal of Financial Economics, Elsevier, vol. 71(2), pages 349-380, February.
  19. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  20. Markus Glaser & Martin Weber, 2003. "Momentum and Turnover: Evidence from the German Stock Market," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 55(2), pages 108-135, April.
  21. Weber, Martin & Camerer, Colin F., 1998. "The disposition effect in securities trading: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 167-184, January.
  22. Nicholas Barberis & Ming Huang, 2006. "The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle," NBER Working Papers 12378, National Bureau of Economic Research, Inc.
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