We propose that heterogeneous asset trading behavior is the result of two distinct, non-convertible mental dimensions: analytical ("quantitative") capability and mentalizing ("perspective-taking") capability. We develop a framework of mental capabilities that yields testable predictions about...

Growing evidence shows that biological factors affect individual financial decisions that could be reflected in financial markets. Testosterone, a chemical messenger especially influential in male physiology, has been shown to affect economic decision making, and is taken as a...

Disposition effect is one phenomenon in behavioral finance that describes investor tendency to sell winner stocks too early and hold loser stocks too long. The purpose of this paper is to examine the disposition effect from investor perspective when they respond to short-run and long-run return...

An efficient market should not show any anomalies. When new information reaches a market which is efficient, it should automatically translate into prices of assets, which ought to eliminate the possibility of gaining an advantage over other investors, thus preventing excess profits. However,...

Rankings are a pervasive feature of the finance industry. Although they have no direct monetary consequences, rankings provide utility for intrinsic (positive self-image) and extrinsic (status) reasons. We recruit a unique subject pool of 204 financial professionals and investigate how anonymous...

We show that the optimal asset allocation for an investor depends crucially on the theory with which the investor is modeled. For the same market data and the same client data different theories lead to different portfolios. The market data we consider is standard asset allocation data. The...

This study extends the literature on portfolio choice under prospect theory preferences by introducing a two-period life cycle model, where the household decides on optimal consumption and investment in a portfolio with one risk-free and one risky asset. The optimal solution depends primarily on...

Microeconomic modeling of investors behavior in financial markets and its results crucially depends on assumptions about the mathematical shape of the underlying preference functions as well as their parameterizations. With the purpose to shed some light on the question, which preferences...

We compare asset allocations that are derived for cumulative prospect theory (CPT) based on two different methods: maximizing CPT along the mean {variance efficient frontier and maximizing CPT without this restriction. We find that with normally distributed returns, the difference between these...

The paper investigates the importance of probability weighting in financial decisions and examines the degree to which risk-taking behavior deviates from expected utility theory in the presence of probability weighting. A group of professional traders participates in an experiment, whose data...