We measure individual-level loss aversion using three incentivized, representative surveys of the U.S. population (combined N=3,000). We find that around 50% of the U.S. population is loss tolerant, with many participants accepting negative-expected-value gambles. This is counter to earlier...

We propose a new framework for pricing assets, derived in part from the traditional consumption-based approach, but which also incorporates two long-standing ideas in psychology: prospect theory, and evidence on how prior outcomes affect risky choice. Consistent with prospect theory, the...

The equity premium puzzle, first documented by Mehra and Prescott, refers to the empirical fact that stocks have greatly outperformed bonds over the last century. As Mehra and Prescott point out, it appears difficult to explain the magnitude of the equity premium within the usual economics...

We review a recent approach to understanding the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decision-making under risk in experimental settings. In equilibrium, models that incorporate these ideas can generate a large...

We use data from the PSID to investigate how households' portfolio allocations change in response to wealth fluctuations. Persistent habits, consumption commitments, and subsistence levels can generate time-varying risk aversion with the consequence that when the level of liquid wealth changes,...

Recently much progress has been made in developing optimal portfolio choice models accomodating time-varying opportunity sets, but unless investors are unreasonably risk averse, optimal holdings include unreasonably large equity positions. One reason is that most studies assume investors behave...

Whether, and to what extent, behavioral anomalies uncovered in the lab manifest themselves in the field remains of first order importance in finance and economics. We begin by examining behavior of retail traders/investors making investment decisions in constructed laboratory markets. Our...

Deferred Acceptance (DA), a widely implemented algorithm, is meant to improve allocations: under classical preferences, it induces preference-concordant rankings. However, recent evidence shows that--in both real, large-stakes applications and experiments--participants frequently play seemingly...

Domestic attempts to use financial incentives for teachers to increase student achievement have been ineffective. In this paper, we demonstrate that exploiting the power of loss aversion--teachers are paid in advance and asked to give back the money if their students do not improve...