This paper explores sources of complexity in dynamic optimization, examining how individuals navigate variation in incomes, prices, and returns in ten-period consumption-saving decisions. Our findings reveal that dynamic optimization poses significant challenges, resulting in suboptimal choices...

In an experiment that elicits subjects' willingness to pay (WTP) for the outcome of a lottery, we confirm the fourfold pattern of risk attitudes described by Kahneman and Tversky. In addition, we document a systematic effect of stake sizes on the magnitude and sign of the relative risk premium,...

We assume that the instantaneous riskless rate reverts towards a central tendency which in turn, is changing stochastically over time. As a result, current short-term rates are not" sufficient to predict future short-term rates movements, as would be the case if the central" tendency was...

This paper proposes a tractable way to model boundedly rational dynamic programming. The agent uses an endogenously simplified, or "sparse," model of the world and the consequences of his actions and acts according to a behavioral Bellman equation. The framework yields a behavioral version of...

We use an experiment to estimate the effect of the SEC's Summary Prospectus, which simplifies mutual fund disclosure. Our subjects chose an equity portfolio and a bond portfolio. Subjects received either statutory prospectuses or Summary Prospectuses. We find no evidence that the Summary...

We propose a unified theory of asset price determination encompassing both "conventional" and "alternative" asset classes (private equity, real estate, etc.). The model features disruption of old by young firms and skewness in the distribution of innovative rents among the young innovators. The...

We analyze a large number of industry- and company-level filings of global institutional investors to provide the first comprehensive estimate of foreign investors' U.S. dollar (USD) security holdings and currency hedging practices. We document four stylized facts. First, driven by increasing...

We study the role of risk preferences and frictions in portfolio choice using variation in 401(k) default options. Patterns of active choice in response to different default funds imply that, absent participation frictions, 94% of investors prefer holding stocks, with an equity share of...

We build a model of the law of small numbers (LSN)--the incorrect belief that even small samples represent the properties of the underlying population--to study its implications for trading behavior and asset prices. In our model, a belief in the LSN induces investors to expect short-term price...

Over the past two decades, respondents to the Shiller Investor Confidence Surveys assess the probability of a catastrophic stock market crash to be much higher that the historical frequency of such events. We decompose these crash probabilities into fundamental and subjective components and use...