1932

Abstract

Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is a need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-092214-043752
2015-12-07
2024-04-22
Loading full text...

Full text loading...

/deliver/fulltext/financial/7/1/annurev-financial-092214-043752.html?itemId=/content/journals/10.1146/annurev-financial-092214-043752&mimeType=html&fmt=ahah

Literature Cited

  1. Ainslie G. 1975. Specious reward: a behavioral theory of impulsiveness and impulse control. Psychol. Bull. 82:463–96 [Google Scholar]
  2. Ang A, Hodrick RJ, Xing Y, Zhang X. 2006. The cross-section of volatility and expected returns. J. Finance 61:259–99 [Google Scholar]
  3. Ang JS, Cheng Y. 2006. Direct evidence on the market-driven acquisitions theory. J. Financ. Res. 29:199–216 [Google Scholar]
  4. Ashby FG, Maddox WT. 2005. Human category learning. Annu. Rev. Psychol. 56:149–78 [Google Scholar]
  5. Asness CS, Moskowitz TJ, Pedersen LH. 2013. Value and momentum everywhere. J. Finance 68:929–85 [Google Scholar]
  6. Baker M. 2009. Capital market-driven corporate finance. Annu. Rev. Financ. Econ. 1:181–205 [Google Scholar]
  7. Baker M, Bradley B, Wurgler J. 2011. Benchmarks as limits to arbitrage: understanding the low-volatility anomaly. Financ. Anal. J. 67:52–63 [Google Scholar]
  8. Baker M, Pan X, Wurgler J. 2012. The effect of reference point prices on mergers and acquisitions. J. Financ. Econ. 106:49–71 [Google Scholar]
  9. Baker M, Wurgler J. 2000. The equity share in new issues and aggregate stock returns. J. Finance 55:2219–57 [Google Scholar]
  10. Baker M, Wurgler J. 2004. A catering theory of dividends. J. Finance 59:1125–65 [Google Scholar]
  11. Baker M, Wurgler J. 2006. Investor sentiment and the cross-section of stock returns. J. Finance 61:1645–80 [Google Scholar]
  12. Baker M, Wurgler J. 2012. Behavioral corporate finance: an updated survey. Handbook of the Economics of Finance GM Constantinides, M Harris, RM Stulz 2357–424 New York: Elsevier [Google Scholar]
  13. Barber B, Odean T. 2000. Trading is hazardous to your wealth: the common stock investment performance of individual investors. J. Finance 55:773–806 [Google Scholar]
  14. Barber B, Odean T. 2002. Online investors: Do the slow die first?. Rev. Financ. Stud. 15:455–88 [Google Scholar]
  15. Barber B, Odean T. 2008. All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors. Rev. Financ. Stud. 21:785–818 [Google Scholar]
  16. Barber B, Odean T, Zheng L. 2005. Out of sight, out of mind: the effects of expenses on mutual fund flows. J. Bus. 78:2095–119 [Google Scholar]
  17. Barberis N, Huang M. 2001. Mental accounting, loss aversion, and individual stock returns. J. Finance 56:1247–92 [Google Scholar]
  18. Barberis N, Huang M. 2008. Stocks as lotteries: the implications of probability weighting for security prices. Am. Econ. Rev. 95:2066–100 [Google Scholar]
  19. Barberis N, Shleifer A. 2003. Style investing. J. Financ. Econ. 68:161–99 [Google Scholar]
  20. Barberis N, Shleifer A, Vishny R. 1998. A model of investor sentiment. J. Financ. Econ. 49:307–43 [Google Scholar]
  21. Barberis N, Shleifer A, Wurgler J. 2005. Comovement. J. Financ. Econ. 75:283–317 [Google Scholar]
  22. Barberis N, Thaler R. 2003. A survey of behavioral finance. Handbook of the Economics of Finance G Constantinides, M Harris, R Stulz 11053–123 Amsterdam: North-Holland [Google Scholar]
  23. Barberis N, Xiong W. 2009. What drives the disposition effect? An analysis of a long-standing preference-based explanation. J. Finance 64:751–84 [Google Scholar]
  24. Barberis N, Xiong W. 2012. Realization utility. J. Financ. Econ. 104:251–71 [Google Scholar]
  25. Ben-David I, Graham JR, Harvey CR. 2013. Managerial miscalibration. Q. J. Econ. 128:1547–84 [Google Scholar]
  26. Ben-David I, Hirshleifer D. 2012. Are investors really reluctant to realize their losses? Trading responses to past returns and the disposition effect. Rev. Financ. Stud. 25:2485–532 [Google Scholar]
  27. Benartzi S. 2001. Excessive extrapolation and the allocation of 401(K) accounts to company stock. J. Finance 56:1747–64 [Google Scholar]
  28. Benartzi S, Thaler R. 1995. Myopic loss aversion and the equity premium puzzle. Q. J. Econ. 110:75–92 [Google Scholar]
  29. Benoit JP, Dubra J, Moore DA. 2015. Does the better-than-average effect show that people are overconfident? Two experiments. J. Europ. Econ. Assoc. 13:293–329 [Google Scholar]
  30. Bernard VL, Thomas JK. 1989. Post-earnings-announcement drift: delayed price response or risk premium?. J. Acc. Res. 27:Suppl.1–48 [Google Scholar]
  31. Bernardo A, Welch I. 2001. On the evolution of overconfidence and entrepreneurs. J. Econ. Manag. Strategy 10:301–30 [Google Scholar]
  32. Bernheim BD. 2009. On the potential of neuroeconomics: a critical (but hopeful) appraisal. Am. Econ. J. Microecon. 1:1–41 [Google Scholar]
  33. Beshears J, Choi JJ, Laibson D, Madrian BC. 2012. Does aggregated returns disclosure increase portfolio risk-taking? Work. Pap., Stanford Univ.
  34. Biais B, Hilton D, Mazurier K, Pouget S. 2005. Judgmental overconfidence, self-monitoring and trading performance in an experimental financial market. Rev. Econ. Stud. 72:287–312 [Google Scholar]
  35. Billett MT, Qian Y. 2008. Are overconfident CEOs born or made? Evidence of self-attribution bias from frequent acquirers. Manag. Sci. 54:1037–51 [Google Scholar]
  36. Bornstein R, D'Agostino P. 1992. Stimulus recognition and the mere exposure effect. J. Personal. Soc. Psychol. 63:545–52 [Google Scholar]
  37. Bossaerts P, Ghirardato P, Guarnaschelli S, Zame WR. 2010. Ambiguity in asset markets: theory and experiment. Rev. Financ. Stud. 23:1325–59 [Google Scholar]
  38. Boyer B, Mitton T, Vorkink K. 2010. Expected idiosyncratic skewness. Rev. Financ. Stud. 23:169–202 [Google Scholar]
  39. Burnside C, Han B, Hirshleifer D, Wang TY. 2011. Investor overconfidence and the forward premium puzzle. Rev. Econ. Stud. 78:523–58 [Google Scholar]
  40. Camerer CF, Ho TH, Chong JK. 2004. A cognitive hierarchy model of games. Q. J. Econ. 119:861–98 [Google Scholar]
  41. Campbell TC, Gallmeyer M, Johnson SA, Rutherford J, Stanley BW. 2011. CEO optimism and forced turnover. J. Financ. Econ. 101:695–712 [Google Scholar]
  42. Cao HH, Han B, Hirshleifer D, Zhang HH. 2011. Fear of the unknown: familiarity and economic decisions. Rev. Finance 15:173–206 [Google Scholar]
  43. Card D, DellaVigna S, Malmendier U. 2011. The role of theory in field experiments. J. Econ. Perspect. 25:339–62 [Google Scholar]
  44. Carlin BI. 2009. Strategic price complexity in retail financial markets. J. Financ. Econ. 91:278–87 [Google Scholar]
  45. Chan LK, Lakonishok J, Sougiannis T. 2001. The stock market valuation of research and development expenditures. J. Finance 56:2431–56 [Google Scholar]
  46. Chan WS, Frankel R, Kothari SP. 2004. Testing behavioral finance theories using trends and consistency in financial performance. J. Account. Econ. 38:3–50 [Google Scholar]
  47. Chang T, Solomon DH, Westerfield MM. 2014. Looking for someone to blame: delegation, cognitive dissonance, and the disposition effect Work. Pap., Univ. South. Calif.
  48. Chen Z, Epstein L. 2002. Ambiguity, risk and asset returns in continuous time. Econometrica 70:1403–43 [Google Scholar]
  49. Chiang YM, Hirshleifer D, Qian Y, Sherman AE. 2011. Do investors learn from experience? Evidence from frequent IPO investors. Rev. Financ. Stud. 24:1560–89 [Google Scholar]
  50. Choi JJ, Laibson D, Madrian BC. 2009. Mental accounting in portfolio choice: evidence from a flypaper effect. Am. Econ. Rev. 99:2085–95 [Google Scholar]
  51. Choi JJ, Laibson D, Madrian BC, Metrick A. 2004. For better or for worse: default effects and 401(k) savings behavior. Perspectives on the Economics of Aging DA Wise 81–121 Chicago, IL: Univ. Chic. Press [Google Scholar]
  52. Choi JJ, Laibson D, Madrian BC, Metrick A. 2009. Reinforcement learning and savings behavior. J. Finance 64:2515–34 [Google Scholar]
  53. Cohen L, Frazzini A, Malloy C. 2010. Sell-side school ties. J. Finance 65:1409–37 [Google Scholar]
  54. Cohen L, Lou D. 2012. Complicated firms. J. Financ. Econ. 104:383–400 [Google Scholar]
  55. Cooper MJ, Gulen H, Rau PR. 2005. Changing names with style: mutual fund name changes and their effects on fund flows. J. Finance 60:2825–58 [Google Scholar]
  56. Cooper MJ, Gulen H, Schill MJ. 2008. Asset growth and the cross-section of stock returns. J. Finance 63:1609–51 [Google Scholar]
  57. Cornelli F, Goldreich D, Ljungqvist A. 2006. Investor sentiment and pre-IPO markets. J. Finance 61:1187–216 [Google Scholar]
  58. Cosmides L, Tooby J. 2013. Evolutionary psychology: new perspectives on cognition and motivation. Annu. Rev. Psychol. 64:201–29 [Google Scholar]
  59. Coval JD, Jurek J, Stafford E. 2009. Economic catastrophe bonds. Am. Econ. Rev. 99:628–66 [Google Scholar]
  60. Coval JD, Moskowitz TJ. 1999. Home bias at home: local equity preference in domestic portfolios. J. Finance 54:2045–73 [Google Scholar]
  61. Coval JD, Shumway T. 2005. Do behavioral biases affect prices?. J. Finance 60:1–34 [Google Scholar]
  62. Coval JD, Thakor AV. 2008. Financial intermediation as a beliefs-bridge between optimists and pessimists. J. Financ. Econ. 75:535–69 [Google Scholar]
  63. Daniel K, Hirshleifer D, Subrahmanyam A. 1998. Investor psychology and security market under- and overreactions. J. Finance 53:1839–86 [Google Scholar]
  64. Daniel KD, Hirshleifer D, Subrahmanyam A. 2001. Overconfidence, arbitrage, and equilibrium asset pricing. J. Finance 56:921–65 [Google Scholar]
  65. Daniel KD, Hirshleifer D, Teoh SH. 2002. Investor psychology in capital markets: evidence and policy implications. J. Monet. Econ. 49:139–209 [Google Scholar]
  66. Daniel KD, Titman S. 2006. Market reactions to tangible and intangible information. J. Finance 61:1605–43 [Google Scholar]
  67. De Bondt W, Thaler R. 1985. Does the stock market overreact?. J. Finance 40:793–808 [Google Scholar]
  68. DeGeorge F, Patel J, Zeckhauser R. 1999. Earnings management to exceed thresholds. J. Bus. 72:1–34 [Google Scholar]
  69. DellaVigna S, Pollet JM. 2007. Demographics and industry returns. Am. Econ. Rev. 97:1667–702 [Google Scholar]
  70. DellaVigna S, Pollet JM. 2009. Investor inattention and Friday earnings announcements. J. Finance 64:709–49 [Google Scholar]
  71. DeLong JB, Shleifer A, Summers L, Waldmann RJ. 1990a. Noise trader risk in financial markets. J. Polit. Econ. 98:703–38 [Google Scholar]
  72. DeLong JB, Shleifer A, Summers L, Waldmann RJ. 1990b. Positive feedback investment strategies and destabilizing rational speculation. J. Finance 45:375–95 [Google Scholar]
  73. DeLong JB, Shleifer A, Summers L, Waldmann RJ. 1991. The survival of noise traders in financial markets. J. Bus. 64:1–20 [Google Scholar]
  74. Diether KB, Malloy CJ, Scherbina A. 2002. Differences of opinion and the cross section of stock returns. J. Finance 57:2113–41 [Google Scholar]
  75. Dong M, Hirshleifer D, Richardson S, Teoh SH. 2006. Does investor misvaluation drive the takeover market?. J. Finance 61:725–62 [Google Scholar]
  76. Dong M, Hirshleifer D, Teoh SH. 2012. Overvalued equity and financing decisions. Rev. Financ. Stud. 25:3645–83 [Google Scholar]
  77. Dougal C, Engelberg J, Parsons C, Wesep EV. 2015. Anchoring on credit spreads. J. Finance 70:1039–80 [Google Scholar]
  78. Edmans A, García D, Norli Ø. 2007. Sports sentiment and stock returns. J. Finance 62:1967–98 [Google Scholar]
  79. Edwards W. 1968. Conservatism in human information processing. Formal Representation of Human Judgment B Kleinmuntz 17–52 New York: Wiley & Sons [Google Scholar]
  80. Ellsberg D. 1961. Risk, ambiguity, and the Savage axioms. Q. J. Econ. 75:643–99 [Google Scholar]
  81. Eraker B, Ready MJ. 2015. Do investors overpay for stocks with lottery-like payoffs? An examination of the returns on OTC stocks. J. Financ. Econ. 115:486–504 [Google Scholar]
  82. Eyster E, Rabin M. 2005. Cursed equilibrium. Econometrica 73:1623–72 [Google Scholar]
  83. Fama EF, French KR. 1993. Common risk factors in the returns on stocks and bonds. J. Financ. Econ. 33:3–56 [Google Scholar]
  84. Festinger L, Carlsmith JM. 1959. Cognitive consequences of forced compliance. J. Abnorm. Soc. Psychol. 58:203–11 [Google Scholar]
  85. Fisher I. 1928. The Money Illusion New York: Adelphi
  86. Foster G, Olsen C, Shevlin T. 1984. Earnings releases, anomalies, and the behavior of security returns. Account. Rev. 59:574–603 [Google Scholar]
  87. Frazzini A, Pedersen LH. 2014. Betting against beta. J. Financ. Econ. 111:1–25 [Google Scholar]
  88. French KR, Poterba JM. 1991. Investor diversification and international equity markets. Am. Econ. Rev. 81:222–26 [Google Scholar]
  89. Frydman C, Barberis N, Camerer C, Bossaerts P, Rangel A. 2014. Using neural data to test a theory of investor behavior: an application to realization utility. J. Finance 69:907–46 [Google Scholar]
  90. Gal D. 2006. A psychological law of inertia and the illusion of loss aversion. Judgm. Decis. Mak. 1:23–32 [Google Scholar]
  91. Gennaioli N, Shleifer A, Vishny R. 2012. Neglected risks, financial innovation, and financial fragility. J. Financ. Econ. 104:452–68 [Google Scholar]
  92. Gennaioli N, Shleifer A, Vishny R. 2015. Money doctors. J. Finance 70:91–114 [Google Scholar]
  93. George T, Hwang CY. 2004. The 52-week high and momentum investing. J. Finance 59:2145–76 [Google Scholar]
  94. Gervais S, Kaniel R, Mingelgrin D. 2001. The high-volume return premium. J. Finance 56:877–919 [Google Scholar]
  95. Gervais S, Odean T. 2001. Learning to be overconfident. Rev. Financ. Stud. 14:1–27 [Google Scholar]
  96. Gigerenzer G, Hoffrage U. 1995. How to improve Bayesian reasoning without instruction: frequency formats. Psychol. Rev. 102:684–704 [Google Scholar]
  97. Gilchrist S, Himmelberg CP, Huberman G. 2005. Do stock price bubbles influence corporate investment?. J. Monet. Econ. 52:805–27 [Google Scholar]
  98. Gilovich T, Griffin D, Kahneman D. 2002. Heuristics and Biases: The Psychology of Intuitive Judgment New York: Camb. Univ. Press
  99. Goel AM, Thakor AV. 2008. Overconfidence, CEO selection, and corporate governance. J. Finance 63:2737–84 [Google Scholar]
  100. Goel AM, Thakor AV. 2010. Do envious CEOs cause merger waves?. Rev. Financ. Stud. 23:487–517 [Google Scholar]
  101. Goetzmann WN, Kumar A. 2008. Equity portfolio diversification. Rev. Finance 12:433–63 [Google Scholar]
  102. Graham JR, Harvey CR. 2001. The theory and practice of corporate finance: evidence from the field. J. Financ. Econ. 60:187–243 [Google Scholar]
  103. Graham JR, Harvey CR, Huang H. 2009. Investor competence, trading frequency, and home bias. Manag. Sci. 55:1094–106 [Google Scholar]
  104. Graham JR, Harvey CR, Puri M. 2013. Managerial attitudes and corporate actions. J. Financ. Econ. 109:103–21 [Google Scholar]
  105. Graham JR, Harvey C, Rajgopal S. 2005. The economic implications of corporate financial reporting. J. Account. Econ. 40:3–73 [Google Scholar]
  106. Greenwood R, Nagel S. 2009. Inexperienced investors and bubbles. J. Financ. Econ. 93:239–58 [Google Scholar]
  107. Griffin JM, Ji S, Martin JS. 2003. Momentum investing and business cycle risk: evidence from pole to pole. J. Finance 58:2515–47 [Google Scholar]
  108. Griffin JM, Nardari F, Stulz RM. 2007. Do investors trade more when stocks have performed well? Evidence from 46 countries. Rev. Financ. Stud. 20:905–51 [Google Scholar]
  109. Grinblatt M, Han B. 2005. Prospect theory, mental accounting, and momentum. J. Financ. Econ. 78:311–39 [Google Scholar]
  110. Grinblatt M, Keloharju M. 2001. How distance, language and culture influence stockholdings and trades. J. Finance 56:1053–73 [Google Scholar]
  111. Grinblatt M, Keloharju M, Linnainmaa JT. 2011. IQ and stock market participation. J. Finance 66:2121–64 [Google Scholar]
  112. Gromb D, Vayanos D. 2010. Limits of arbitrage. Annu. Rev. Financ. Econ. 2:251–75 [Google Scholar]
  113. Guercio DD, Reuter J. 2014. Mutual fund performance and the incentive to generate alpha. J. Finance 69:1673–704 [Google Scholar]
  114. Guiso L, Sapienza P, Zingales L. 2008. Trusting the stock market. J. Finance 63:2557–600 [Google Scholar]
  115. Guiso L, Sapienza P, Zingales L. 2009. Cultural biases in economic exchange?. Q. J. Econ. 124:1095–131 [Google Scholar]
  116. Haidt J, Kesebir S. 2010. Morality.. Handbook of Social Psychology ST Fiske, DT Gilbert, G Lindzey 797–832 Hoboken, NJ: Wiley, 5th ed.. [Google Scholar]
  117. Han B, Hirshleifer D. 2015. Self-enhancing transmission bias and active investing Work. Pap., Univ. Tex. Austin
  118. Harris L, Gurel E. 1986. Price and volume effects associated with changes in the S&P 500 list: new evidence for the existence of price pressures. J. Finance 41:815–29 [Google Scholar]
  119. Haselton MG, Nettle D. 2006. The paranoid optimist: an integrative evolutionary model of cognitive biases. Personal. Soc. Psychol. Rev. 10:47–66 [Google Scholar]
  120. Heath C, Tversky A. 1991. Preferences and beliefs: ambiguity and competence in choice under uncertainty. J. Risk Uncertaint. 4:5–28 [Google Scholar]
  121. Henderson BJ, Jegadeesh N, Weisbach MS. 2006. World markets for raising new capital. J. Financ. Econ. 82:63–101 [Google Scholar]
  122. Henderson V. 2012. Prospect theory, liquidation, and the disposition effect. Manag. Sci. 58:445–60 [Google Scholar]
  123. Hilary G, Hsu C. 2011. Endogenous overconfidence in managerial forecasts. J. Account. Econ. 51:300–13 [Google Scholar]
  124. Hilary G, Hui KW. 2009. Does religion matter in corporate decision making in America?. J. Financ. Econ. 93:455–73 [Google Scholar]
  125. Hirshleifer D. 2001. Investor psychology and asset pricing. J. Finance 64:1533–97 [Google Scholar]
  126. Hirshleifer D. 2008. Psychological bias as a driver of financial regulation. Eur. Financ. Manag. 14:856–74 [Google Scholar]
  127. Hirshleifer D, Hou K, Teoh SH. 2012. The accrual anomaly: risk or mispricing?. Manag. Sci. 58:320–35 [Google Scholar]
  128. Hirshleifer D, Hou K, Teoh SH, Zhang Y. 2004. Do investors overvalue firms with bloated balance sheets?. J. Account. Econ. 38:297–331 [Google Scholar]
  129. Hirshleifer D, Jiang D. 2010. A financing-based misvaluation factor and the cross section of expected returns. Rev. Financ. Stud. 23:3401–36 [Google Scholar]
  130. Hirshleifer D, Lim SS, Teoh SH. 2009. Driven to distraction: extraneous events and underreaction to earnings news. J. Finance 64:2289–325 [Google Scholar]
  131. Hirshleifer D, Lim SS, Teoh SH. 2011. Limited investor attention and stock market misreactions to accounting information. Rev. Asset Pricing Stud. 1:35–73 [Google Scholar]
  132. Hirshleifer D, Low A, Teoh SH. 2012. Are overconfident CEOs better innovators?. J. Finance 67:1457–98 [Google Scholar]
  133. Hirshleifer D, Shumway T. 2003. Good day sunshine: stock returns and the weather. J. Finance 58:1009–32 [Google Scholar]
  134. Hirshleifer D, Subrahmanyam A, Titman S. 2006. Feedback and the success of irrational traders. J. Financ. Econ. 81:311–38 [Google Scholar]
  135. Hirshleifer D, Teoh SH. 2003. Limited attention, information disclosure, and financial reporting. J. Account. Econ. 36:337–86 [Google Scholar]
  136. Hirshleifer D, Teoh SH. 2009a. The psychological attraction approach to accounting and disclosure policy. Contemp. Account. Res. 26:1067–90 [Google Scholar]
  137. Hirshleifer D, Teoh SH. 2009b. Thought and behavior contagion in capital markets. Handbook of Financial Markets: Dynamics and Evolution T Hens, K Schenk-Hoppe 1–46 Amsterdam: North-Holland [Google Scholar]
  138. Hirshleifer D, Teoh SH, Yu JJ. 2011. Short arbitrage, return asymmetry and the accrual anomaly. Rev. Financ. Stud. 24:2429–61 [Google Scholar]
  139. Hirshleifer D, Welch I. 2002. An economic approach to the psychology of change: amnesia, inertia, and impulsiveness. J. Econ. Manag. Strategy 11:379–421 [Google Scholar]
  140. Hong H, Kacperczyk M. 2009. The price of sin: the effects of social norms on markets. J. Financ. Econ. 93:15–36 [Google Scholar]
  141. Hong H, Kostovetsky L. 2012. Red and blue investing: values and finance. J. Financ. Econ. 103:1–19 [Google Scholar]
  142. Hong H, Lim T, Stein J. 2000. Bad news travels slowly: size, analyst coverage and the profitability of momentum strategies. J. Finance 55:265–95 [Google Scholar]
  143. Hong H, Scheinkman JA, Xiong W. 2006. Asset float and speculative bubbles. J. Finance 61:1073–117 [Google Scholar]
  144. Hong H, Stein J. 1999. A unified theory of underreaction, momentum trading and overreaction in asset markets. J. Finance 54:2143–84 [Google Scholar]
  145. Huberman G. 2001. Familiarity breeds investment. Rev. Financ. Stud. 14:659–80 [Google Scholar]
  146. Huberman G, Regev T. 2001. Contagious speculation and a cure for cancer. J. Finance 56:387–96 [Google Scholar]
  147. Hutton I, Jiang D, Kumar A. 2014. Corporate policies of republican managers. J. Financ. Quant. Anal. 49:1279–310 [Google Scholar]
  148. Ikenberry D, Lakonishok J, Vermaelen T. 1995. Market underreaction to open market share repurchases. J. Financ. Econ. 39:181–208 [Google Scholar]
  149. Ingersoll JE, Jin LJ. 2013. Realization utility with reference-dependent preferences. Rev. Financ. Stud. 26:723–67 [Google Scholar]
  150. Jegadeesh N, Titman S. 1993. Returns to buying winners and selling losers: implications for stock market efficiency. J. Finance 48:65–91 [Google Scholar]
  151. Jegadeesh N, Titman S. 2011. Momentum Work. Pap., Emory Univ.
  152. Jensen MC. 2005. Agency costs of overvalued equity. Financ. Manag. 34:5–19 [Google Scholar]
  153. Jiang D, Kumar A, Law K. 2014. Political contributions and analyst behavior Work. Pap., Fla. State Univ.
  154. Jiang G, Lee C, Zhang Y. 2005. Information uncertainty and expected returns. Rev. Account. Stud. 10:185–221 [Google Scholar]
  155. Kahneman D. 2011. Thinking, Fast and Slow New York: Farrar, Straus & Giroux
  156. Kahneman D, Frederick S. 2002. Representativeness revisited: attribute substitution in intuitive judgment. See Gilovich, Griffin & Kahneman 2002 49–81
  157. Kahneman D, Knetsch JL, Thaler R. 1990. Experimental tests of the endowment effect and the Coase theorem. J. Polit. Econ. 98:1325–48 [Google Scholar]
  158. Kahneman D, Lovallo D. 1993. Timid choices and bold forecasts: a cognitive perspective on risk taking. Manag. Sci. 39:17–31 [Google Scholar]
  159. Kahneman D, Slovic P, Tversky A. 1982. Judgement Under Uncertainty: Heuristics and Biases New York: Cambridge Univ. Press
  160. Kahneman D, Tversky A. 1973. On the psychology of prediction. Psychol. Rev. 80:237–51 [Google Scholar]
  161. Kahneman D, Tversky A. 1979. Prospect theory: an analysis of decision under risk. Econometrica 47:263–91 [Google Scholar]
  162. Kamstra M, Kramer L, Levi M. 2000. Winter blues: a SAD stock market cycle. Am. Econ. Rev. 93:324–43 [Google Scholar]
  163. Kaustia M, Knüpfer S. 2012. Peer performance and stock market entry. J. Financ. Econ. 104:321–38 [Google Scholar]
  164. Klibanoff P, Lamont O, Wizman TA. 1998. Investor reaction to salient news in closed-end country funds. J. Finance 53:673–99 [Google Scholar]
  165. Kuhnen CM, Knutson B. 2011. The influence of affect on beliefs, preferences and financial decisions. J. Financ. Quant. Anal. 46:605–26 [Google Scholar]
  166. Kumar A. 2009. Who gambles in the stock market?. J. Finance 64:1889–933 [Google Scholar]
  167. Kumar A, Lee C. 2006. Retail investor sentiment and return comovements. J. Finance 61:2451–86 [Google Scholar]
  168. Kumar A, Page JK, Oliver G, Spalt OG. 2011. Religious beliefs, gambling attitudes and financial market outcomes. J. Financ. Econ. 102:671–708 [Google Scholar]
  169. Laibson D. 1997. Golden eggs and hyperbolic discounting. Q. J. Econ. 112:443–77 [Google Scholar]
  170. Lakonishok J, Shleifer A, Vishny R. 1994. Contrarian investment, extrapolation and risk. J. Finance 49:1541–78 [Google Scholar]
  171. Lamont O, Thaler R. 2003. Can the market add and subtract? Mispricing in tech stock carve-outs. J. Polit. Econ. 111:227–68 [Google Scholar]
  172. Langer EJ, Roth J. 1975. Heads I win, tails it's chance: the illusion of control as a function of the sequence of outcomes in a purely chance task. J. Personal. Soc. Psychol. 32:951–55 [Google Scholar]
  173. Lee C, Shleifer A, Thaler R. 1991. Investor sentiment and the closed-end fund puzzle. J. Finance 46:75–109 [Google Scholar]
  174. Lerner JS, Keltner D. 2001. Fear, anger, and risk. J. Personal. Soc. Psychol. 81:146–59 [Google Scholar]
  175. Li Y, Yang L. 2013. Prospect theory, the disposition effect, and asset prices. J. Financ. Econ. 107:715–39 [Google Scholar]
  176. Libby R, Bloomfield R, Nelson MW. 2002. Experimental research in financial accounting. Account. Organ. Soc. 27:775–810 [Google Scholar]
  177. Lim SS. 2006. Do investors integrate losses and segregate gains? Mental accounting and investor trading decisions. J. Bus. 79:2539–73 [Google Scholar]
  178. Ljungqvist A, Nanda V, Singh R. 2006. Hot markets, investor sentiment, and IPO pricing. J. Bus. 79:1667–702 [Google Scholar]
  179. Loughran T, Ritter J. 1995. The new issues puzzle. J. Finance 50:23–52 [Google Scholar]
  180. Loughran T, Vijh AM. 1997. Do long-term shareholders benefit from corporate acquisitions?. J. Finance 52:1765–90 [Google Scholar]
  181. Lusardi A, Mitchell OS. 2011. Financial literacy around the world: an overview. J. Pension Econ. Finance 10:497–508 [Google Scholar]
  182. Madrian B, Shea D. 2001. The power of suggestion: inertia in 401(K) participation and savings behavior. Q. J. Econ. 116:1149–87 [Google Scholar]
  183. Malmendier U, Shanthikumar D. 2007. Are small investors naive about incentives?. J. Financ. Econ. 85:457–89 [Google Scholar]
  184. Malmendier U, Tate G. 2005. CEO overconfidence and corporate investment. J. Finance 60:2661–700 [Google Scholar]
  185. Malmendier U, Tate G. 2008. Who makes acquisitions? CEO overconfidence and the market's reaction. J. Financ. Econ. 89:20–43 [Google Scholar]
  186. Malmendier U, Tate G, Yan J. 2011. Overconfidence and early-life experiences: the effect of managerial traits on corporate financial policies. J. Finance 66:1687–733 [Google Scholar]
  187. McGuire ST, Omer TC, Sharp NY. 2012. The impact of religion on financial reporting irregularities. Account. Rev. 87:645–73 [Google Scholar]
  188. Mehra R, Prescott EC. 1985. The equity premium: a puzzle. J. Monet. Econ. 15:145–61 [Google Scholar]
  189. Mehra R, Sah R. 2002. Mood fluctuations, projection bias, and volatility of equity prices. J. Econ. Dyn. Control 26:869–87 [Google Scholar]
  190. Merkle C, Weber M. 2011. True overconfidence: the inability of rational information processing to account for apparent overconfidence. Org. Behav. Hum. Decis. Process. 116:262–71 [Google Scholar]
  191. Miller E. 1977. Risk, uncertainty, and divergence of opinion. J. Finance 32:1151–68 [Google Scholar]
  192. Moskowitz TJ, Ooi YH, Pedersen LH. 2012. Time series momentum. J. Financ. Econ. 104:228–50 [Google Scholar]
  193. Nagel S. 2005. Short sales, institutional investors and the cross-section of stock returns. J. Financ. Econ. 78:277–309 [Google Scholar]
  194. Nisbett RE, Wilson TD. 1977. Telling more than we can know: verbal reports on mental processes. Psychol. Rev. 84:231–59 [Google Scholar]
  195. Odean T. 1998. Volume, volatility, price and profit when all traders are above average. J. Finance 53:1887–934 [Google Scholar]
  196. Ozsoylev H, Walden J, Yavuz MD, Bildik R. 2014. Investor networks in the stock market. Rev. Financ. Stud. 27:1323–66 [Google Scholar]
  197. Peng L, Xiong W. 2006. Investor attention, overconfidence and category learning. J. Financ. Econ. 80:563–602 [Google Scholar]
  198. Polk C, Sapienza P. 2009. The stock market and corporate investment: a test of catering theory. Rev. Financ. Stud. 22:187–217 [Google Scholar]
  199. Puri M, Robinson DT. 2007. Optimism and economic choice. J. Financ. Econ. 86:71–99 [Google Scholar]
  200. Qiu X, Welch I. 2006. Investor sentiment measures Work. Pap., Brown Univ.
  201. Rabin M. 2000. Risk aversion and expected-utility theory: a calibration theorem. Econometrica 68:1281–92 [Google Scholar]
  202. Rashes MS. 2001. Massively confused investors making conspicuously ignorant choices (MCI–MCIC). J. Finance 56:1911–27 [Google Scholar]
  203. Rhodes-Kropf M, Robinson DT, Viswanathan S. 2005. Valuation waves and merger activity: the empirical evidence. J. Financ. Econ. 77:561–603 [Google Scholar]
  204. Richardson S, Teoh SH, Wysocki PD. 2004. The walk-down to beatable analyst forecasts: the role of equity issuance and insider trading incentives. Contemp. Account. Res. 21:885–924 [Google Scholar]
  205. Ritter JR, Warr RS. 2002. The decline of inflation and the bull market of 1982 to 1999. J. Financ. Quant. Anal. 37:29–61 [Google Scholar]
  206. Samuelson W, Zeckhauser R. 1988. Status-quo bias in decision making. J. Risk Uncertain. 1:7–59 [Google Scholar]
  207. Saunders EM. 1993. Stock prices and Wall Street weather. Am. Econ. Rev. 83:1337–45 [Google Scholar]
  208. Schwarz N, Clore GL. 1983. Mood, misattribution, and judgments of well-being: informative and directive functions of affective states. J. Personal. Soc. Psychol. 45:513–23 [Google Scholar]
  209. Shefrin H, Statman M. 1984. Explaining investor preference for cash dividends. J. Financ. Econ. 13:253–82 [Google Scholar]
  210. Shefrin H, Statman M. 1985. The disposition to sell winners too early and ride losers too long: theory and evidence. J. Finance 40:777–90 [Google Scholar]
  211. Shiller RJ. 1999. Human behavior and the efficiency of the financial system. Handbook of Macroeconomics 1A JB Taylor, M Woodford 1305–40 Amsterdam: North-Holland [Google Scholar]
  212. Shiller RJ. 2000. Irrational Exuberance Princeton, NJ: Princeton Univ. Press
  213. Shleifer A. 1986. Do demand curves for stocks slope down?. J. Finance 41:579–90 [Google Scholar]
  214. Shleifer A. 2000. Inefficient Markets: An Introduction to Behavioral Finance Oxford: Oxf. Univ. Press
  215. Shleifer A, Vishny R. 1997. The limits to arbitrage. J. Finance 52:35–55 [Google Scholar]
  216. Shleifer A, Vishny R. 2003. Stock market driven acquisitions. J. Financ. Econ. 70:295–311 [Google Scholar]
  217. Simon D, Heimer R. 2014. Facebook finance: how social interaction propagates active investing Work. Pap., Brandeis Univ.
  218. Simon HA. 1956. Rational choice and the structure of environments. Psychol. Rev. 63:129–38 [Google Scholar]
  219. Sloan R. 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings?. Account. Rev. 71:289–315 [Google Scholar]
  220. Slovic P, Finucan M, Peters E, MacGregor DG. 2002. The affect heuristic. See Gilovich, Griffin & Kahneman 2002, pp. 397–420
  221. Smith VL. 2008. Experimental economics. The New Palgrave Dictionary of Economics SN Durlauf, LE Blume Basingstoke, UK: Palgrave Macmillan, 2nd. http://www.dictionaryofeconomics.com/article?id=pde2008_E000277 [Google Scholar]
  222. Smith VL, Suchanek GL, Williams AW. 1988. Bubbles, crashes and endogenous expectations in experimental spot asset markets. Econometrica 56:1119–51 [Google Scholar]
  223. Spiess DK, Affleck-Graves J. 1995. Underperformance in long-run stock returns following seasoned equity offerings. J. Financ. Econ. 38:243–68 [Google Scholar]
  224. Stambaugh R, Yu J, Yuan Y. 2012. The short of it: investor sentiment and anomalies. J. Financ. Econ. 104:288–302 [Google Scholar]
  225. Stanovich KE. 1999. Who Is Rational? Studies of Individual Differences in Reasoning Mahwah, NJ: Lawrence Erlbaum Assoc.
  226. Statman M, Thorley S, Vorkink K. 2006. Investor overconfidence and trading volume. Rev. Financ. Stud. 19:1531–65 [Google Scholar]
  227. Staw BM. 1976. Knee-deep in the big muddy: a study of escalating commitment to a chosen course of action. Organ. Behav. Hum. Perform. 16:27–44 [Google Scholar]
  228. Stein J. 1996. Rational capital budgeting in an irrational world. J. Bus. 69:429–55 [Google Scholar]
  229. Swaminathan B. 1996. Time-varying expected small firm returns and closed-end fund discounts. Rev. Financ. Stud. 9:845–88 [Google Scholar]
  230. Teoh SH, Welch I, Wong TJ. 1998a. Earnings management and the long-term market performance of initial public offerings. J. Finance 53:1935–74 [Google Scholar]
  231. Teoh SH, Welch I, Wong TJ. 1998b. Earnings management and the underperformance of seasoned equity offerings. J. Financ. Econ. 50:63–99 [Google Scholar]
  232. Teoh SH, Wong TJ. 2002. Why do new issues and high accrual firms underperform? The role of analysts' credulity. Rev. Financ. Stud. 15:869–900 [Google Scholar]
  233. Tesar LL, Werner IM. 1995. Home bias and high turnover. J. Int. Money Finance 14:467–92 [Google Scholar]
  234. Thaler R. 1980. Toward a positive theory of consumer choice. J. Econ. Behav. Organ. 1:39–60 [Google Scholar]
  235. Thaler R, Shefrin HM. 1981. An economic theory of self-control. J. Polit. Econ. 89:392–406 [Google Scholar]
  236. Thaler R, Sunstein CR. 2008. Nudge: Improving Decisions About Health, Wealth, and Happiness New Haven, CT: Yale Univ. Press
  237. Titman S, Wei JK, Xie F. 2004. Capital investment and stock returns. J. Financ. Quant. Anal. 39:677–701 [Google Scholar]
  238. Trivers R. 1991. Deceit and self-deception. Man and Beast Revisited MH Robinson, L Tiger 175–191 Washington, DC: Smithsonian [Google Scholar]
  239. Tversky A, Kahneman D. 1971. Belief in the law of small numbers. Psychol. Bull. 76:105–10 [Google Scholar]
  240. Tversky A, Kahneman D. 1981. The framing of decisions and the psychology of choice. Science 211:453–58 [Google Scholar]
  241. Tversky A, Kahneman D. 1992. Advances in prospect theory: cumulative representation of uncertainty. J. Risk Uncertain. 5:297–323 [Google Scholar]
  242. Weber EU, Siebenmorgen N, Weber M. 2005. Communicating asset risk: how name recognition and the format of historic volatility information affect risk perception and investment decisions. Risk Anal. 25:597–609 [Google Scholar]
  243. Weinstein ND. 1980. Unrealistic optimism about future life events. J. Personal. Soc. Psychol. 39:806–20 [Google Scholar]
  244. Welch I, Levi Y. 2013. Long-term asset-class based capital budgeting Work. Pap., Univ. Calif. Los Angeles
  245. Xiong W, Yu J. 2011. The Chinese warrants bubble. Am. Econ. Rev. 101:2723–53 [Google Scholar]
  246. Yan H. 2008. Natural selection in financial markets: Does it work?. Manag. Sci. 54:1935–50 [Google Scholar]
/content/journals/10.1146/annurev-financial-092214-043752
Loading
  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error