This article presents a model for valuing claims subject to default by both contracting parties, such as swaps and forwards. With counterparties of different default risk, the promised cash flows of a swap are discounted by a switching discount rate that, at any given state and time, is equal to...

We investigate whether prospect theory preferences can predict a disposition effect. We consider two implementations of prospect theory: in one case, preferences are defined over "annual" gains and losses; in the other, they are defined over "realized" gains and losses. Surprisingly, the annual...

We examine how the evidence of predictability in asset returns affects optimal portfolio choice for investors with long horizons. Particular attention is paid to estimation risk, or uncertainty about the true values of model parameters. We find that even after incorporating parameter...

We study equilibrium firm-level stock returns in two economies: one in which investors are loss averse over the fluctuations of their stock portfolio, and another in which they are loss averse over the fluctuations of individual stocks that they own. Both approaches can shed light on empirical...

type="main" <title type="main">ABSTRACT</title> <p>We conduct a study in which subjects trade stocks in an experimental market while we measure their brain activity using functional magnetic resonance imaging. All of the subjects trade in a suboptimal way. We use the neural data to test a “realization utility”...</p>