We study the asset pricing implications of Tversky and Kahneman's (1992) cumulative prospect theory, with particular focus on its probability weighting component. Our main result, derived from a novel equilibrium with non-unique global optima, is that, in contrast to the prediction of a standard...

We argue that narrow framing, whereby an agent who is offered a new gamble evaluates that gamble in isolation, separately from other risks she already faces, may be a more important feature of decision-making under risk than previously realized. To demonstrate this, we present evidence on...

We argue that quot;narrow framing,quot; whereby an agent who is offered a new gamble evaluates that gamble in isolation, separately from other risks she already faces, may be a more important feature of decision-making than previously realized. Our starting point is the evidence that people are...

Do asset prices affect real activity? This question has taken on a new importance in recent years, as asset values first surged at the end of 1990s and, thereafter, dramatically retreated. This report reviews the available theoretical and empirical evidence regarding asset price and wealth...

Households hold undiversified stock portfolios of firms headquartered near their city of residence. Leading explanations assign a causal role for proximity. The literature neglects that distance is endogenous. Households may locate based on unobservables such as optimism about a city's economic...

We analyze household stock market participation and allocation in a survey covering 19 European countries. We jointly control for all relevant variables from prior studies, which typically focus on one at a time, and omit risk-aversion. Excellent full model predictive power decomposes into...

We investigate the relationship between susceptibility to the disposition effect (DE) and chronic individual differences in reliance on System 1 or System 2 processes and habitual emotion regulation strategies. Using UK stock market investors' trading records, we measure their susceptibility to...

This study examines whether financial literacy affects stock market participation. We use data from the Preference Parameter Study, a nationwide survey in Japan, made by Osaka University. Our results show that financial literacy significantly improves stock market participation even after...

The 4% rule is the advice many retirees follow for managing spending and investing. We examine this rule's inefficienciesmdash;the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10ndash;20% of a...

Men are strikingly more optimistic about the future performance of key economic and financial indicators than women. We report surprisingly strong and highly significant gender differences in consumer confidence data of seventeen out of eighteen countries, including the US. We confirm these...