Estimates of agents' risk aversion differ between market studies and experimental studies. We demonstrate that the estimates can be reconciled through consistent treatment of agents' tendency for narrow framing, regarding integration of background wealth as well as across risky outcomes: Risk...

Estimates of agents’ risk aversion differ between market studies and experimental studies. We demonstrate that these estimates can be reconciled through consistent treatment of agents’ propensity for narrow framing.

We examine time discounting factors in an international survey. Our analysis reveals a significant relationship between time discount factors and historical equity premiums across 27 countries. This result implies that higher historical equity risk premiums are observed in countries where survey...

The paper shows that financial market equilibria need not exist if agents possess cumulative prospect theory preferences with piecewise-power value functions. The reason is an infiniteshort-selling problem. But even when a short-sell constraint is added, non-existence can occur due to...

We study properties of structured financial products optimizing a utility functional of a customer. The conventional method may have the disadvantage that the a priori restriction to a certain number of assets could make it impossible to find the optimal portfolio. So instead of optimizing the...

This paper studies an application of a Darwinian theory of portfolioselection to stocks listed in the Dow Jones Industrial Average (DJIA).We analyze numerically the long-run outcome of the competition offix-mix portfolio rules in a stock market with actual DJIA dividends.In the model seemingly...

The prospect theory of Kahneman and Tversky (1979) and the cumulative prospect theory of Tversky and Kahneman (1992) are descriptive models for decision making that summarize several violations of the expected utility theory. This paper gives a survey of applications of prospect theory to the...

This paper shows that a stock market is evolutionary stable if andonly if stocks are evaluated by expected relative dividends. Any othermarket can be invaded by portfolio rules that will gain market wealthand hence change the valuation. In the model the valuation of assetsis given by the wealth...

The disposition effect is the observation that investors hold winning stocks too long and sell losing stocks too early. A standard explanation of the disposition effect refers to prospect theory and in particular to the asymmetric risk aversion according to which investors are risk averse when...

We argue that the equity premium puzzle stems from a mismatch of applying mental accounting to experiments on risk aversion but not to the standard consumption based asset pricing model. If, as we suggest, one applies mental accounting consistently in both areas the degrees of risk aversions...