We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 22 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors' prior gains and losses, and makes...

We present an extrapolative model of bubbles. In the model, many investors form their demand for a risky asset by weighing two signals—an average of the asset's past price changes and the asset's degree of overvaluation. The two signals are in conflict, and investors “waver” over time in...

In the past decade, researchers in psychology and neuroscience studying human decision-making have increasingly adopted a framework that combines two systems, namely "model-free" and "model-based" learning. We import this framework into a simple financial setting, study its properties, and use...

In the past decade, researchers in psychology and neuroscience studying human decision-making have increasingly adopted a framework that combines two systems, namely "model-free" and "model-based" learning. We import this framework into a simple financial setting, study its properties, and link...

Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns: they expect the stock market to perform well (poorly) in the near future if it performed well (poorly) in the recent past. Such beliefs are hard to reconcile with existing...

We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 23 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors’ prior gains and losses, and makes...