We examined prospect theory and reference point adaptation following gains or losses using participants from China, Korea, and the US. Supporting prospect theory, we found in Studies 1 and 2 that subjects from all three countries generally exhibited loss aversion and a greater propensity for...

I propose here the psychological attraction theory of financial regulation—that regulation is the result of psychological biases on the part of political participants—voters, politicians, bureaucrats, and media commentators; and of regulatory ideologies that exploit these biases. Some key...

This paper models how imperfect memory affects the optimal continuity of policies. We examine the choices of a player (individual or firm) who observes previous actions but cannot remember the rationale for these actions. In a stable environment, the player optimally responds to memory loss with...

This paper offers a multisecurity model in which prices reflect both covariance risk and misperceptions of firms' prospects, and in which arbitrageurs trade to profit from mispricing. We derive a pricing relationship in which expected returns are linearly related to both risk and mispricing...

Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced by investors. The "investor distraction hypothesis" holds that extraneous news inhibits market reactions to relevant news. We...

We examined reference point adaptation following gains or losses in security trading using participants from China, Korea, and the US. In both questionnaire studies and trading experiments with real money incentives, reference point adaptation was larger for Asians than for Americans. Subjects...

Purpose – Sometimes resources are badly employed because of coordination failures. Actions by decision makers that affect the likelihood of such failures are sometimes said to cause “systemic risk.” This paper seeks to consider the externality in the choice of ex ante risk management...

Futures hedging and pricing are examined in a model with two consumption goods, stochastic output, and sequential information arrival. Positive (negative) complementarity in consumer preferences promotes greater futures risk premia. The partial equilibrium conclusion that risk premia are a...

If investors have limited attention, then accounting outcomes that saliently highlight positive aspects of a firm's performance will promote high market valuations. When cumulative accounting value added (net operating income) over time outstrips cumulative cash value added (free cash flow), it...

Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relation between morning sunshine at a country's leading stock exchange and market index stock returns that day at 26 stock exchanges internationally from 1982- 97....