Loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion. The intuition is that the first-order-different utility impact of wealth gains and losses leads loss-averse investors to behave similarly to investors with high risk...

Loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion. The intuition is that the different utility impact of wealth gains and losses leads loss-averse investors to behave similarly to investors with high risk aversion. But if...

In a setting with information asymmetry and a tradable value-weighted market index, ambiguity averse investors hold undiversified portfolios, and assets have non-zero alphas. But when a passive fund offers the risk-adjusted market portfolio (RAMP) whose weights depend on information precisions...

How should a decision-maker allocate R&D funds when a group of experts provides divergent estimates on a technology's potential effectiveness? To address this question, we propose a simple decision-theoretic framework that takes into account ambiguity over the aggregation of expert opinion and a...

Asymmetric shocks are common in markets; securities'; payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices. A three funds separation theorem...

This paper presents a rational expectations model of asset prices with rationally inattentive investors that, unlike previous papers, explains both the substantial amount of equity wealth invested domestically and the puzzling time series behavior of the home bias - an initial plateau before...

We construct a zero-net-worth uninformed "naive investor" who uses a random portfolio allocation strategy. We then compare the returns of the momentum strategist to the return distribution of naive investors. For this purpose we reward momentum profits relative to the return percentiles of the...

There is pervasive evidence that individuals invest primarily in domestic assets and thus hold poorly diversified portfolios. Empirical studies suggest that informational asymmetries may play a role in explaining the bias towards domestic assets. In contrast, theoretical studies based on...