A Behavioral Approach to Asset Pricing / Edition 2

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Overview

“A mathematical-economist-turned-behavioral-economist, Hersh Shefrin challenges and delights the reader by applying concepts of behavioral economics with emphasis on investor heterogeneity to revisit a broad spectrum of topics in finance including portfolio management, trading, and the pricing of equities, bonds and options.”
George M. Constantinides, Leo Melamed Professor of Finance, The University of Chicago Graduate School of Business

“The flood of empirical asset pricing research in recent years has often required financial economists to choose between two unpalatable options: either embrace the rich range of evidence with a somewhat atheoretical view; or, simply ignore that large portion of the evidence that conflicts with classical asset pricing theory. The behavioral finance pioneer Hersh Shefrin, in this new edition of his treatise, shows that one need not choose between theory and data. He shows that a number of seemingly "behavioral" patterns in the data can in fact be derived from a suitably modified version of the stochastic discount factor framework. Impressive in both scope and attention to detail, this book will be valuable for researchers, teachers, students, and investment professionals.”
Jeffrey Wurgler, Research Professor of Finance, NYU Stern School of Business

“Judging from the large volume of trade in the financial markets and the astounding volatility of prices, one has to accept the idea that investors hold divergent and fast fluctuating beliefs. For this to make sense, I see only two possible hypotheses. Both individual and professional investors receive a lot of information — some of it public but a lot more of it private — on which they act. Or they all receive similar information but each one interprets that information somewhat differently from the other. Although it is not quite rational, I find the latter behaviour more plausible than the former. A large part of the second edition of A Behavioral Approach to Asset Pricing is devoted to developing this arresting, although by no means mainstream, hypothesis. In that endeavour, Professor Shefrin is a maverick and a pioneer.”
Bernard Dumas, Professor of Finance, Swiss Finance Institute, Université de Lausanne, Switzerland

Praise for the First Edition:
“This book provides a much-needed bridge between behavioral finance and traditional asset pricing theory, so that the insights that the two fields offer can complement each other. This book will make the theory of behavioral finance far more useful and broadly applicable.”
Robert Shiller, Cowles Foundation for Research in Economics, International Center for Finance, Yale University

Incorporating the latest theory and empirical research, the second edition of A Behavioral Approach to Asset Pricing provides the most up-to-date and comprehensive discussion of how psychology affects market activity. The key message remains: that the future of asset pricing theory lies in bringing together the powerful SDF-based tools adopted by neoclassical asset pricing theorists and the more realistic assumptions adopted by behavioral asset pricing theorists. The most important equation in the first edition is the decomposition of the log-SDF into sentiment and a fundamental component. In the second edition, Shefrin extends the analysis to demonstrate how this equation can be generalized to encompass the combination of behavioral preferences and behavioral beliefs. This generalization provides a unified approach that ties together the main ideas in the book.

The book is supported by a companion website, which contains examples worked out as Excel spreadsheets so that readers can input their own data to test the results.

Hersh Shefrin is Mario L. Belotti Professor of Finance, Leavey School of Business, Santa Clara University, CA, USA

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Editorial Reviews

From the Publisher
"A mathematical-economist-turned-behavioral-economist, Hersh Shefrin challenges and delights the reader by applying concepts of behavioral economics with emphasis on investor heterogeneity to revisit a broad spectrum of topics in finance including portfolio management, trading, and the pricing of equities, bonds and options."
George M. Constantinides, Leo Melamed Professor of Finance, The University of Chicago Graduate School of Business

"The flood of empirical asset pricing research in recent years has often required financial economists to choose between two unpalatable options: either embrace the rich range of evidence with a somewhat atheoretical view; or, simply ignore that large portion of the evidence that conflicts with classical asset pricing theory. The behavioral finance pioneer Hersh Shefrin, in this new edition of his treatise, shows that one need not choose between theory and data. He shows that a number of seemingly "behavioral" patterns in the data can in fact be derived from a suitably modified version of the stochastic discount factor framework. Impressive in both scope and attention to detail, this book will be valuable for researchers, teachers, students, and investment professionals."
Jeffrey Wurgler, Research Professor of Finance, NYU Stern School of Business

Praise for the First Edition:
"This book will make the theory of behavioral finance far more useful and broadly applicable."
Bob Shiller, Cowles Foundation for Research in Economics, International Center for Finance, Yale University

Read More Show Less

Product Details

  • ISBN-13: 9780123743565
  • Publisher: Elsevier Science
  • Publication date: 5/15/2008
  • Series: Academic Press Advanced Finance Series
  • Edition description: New Edition
  • Edition number: 2
  • Pages: 618
  • Product dimensions: 6.20 (w) x 9.00 (h) x 1.50 (d)

Meet the Author

Hersh Shefrin holds the Mario L. Belotti Chair in the Department of Finance at Santa Clara University's Leavey School of Business. He is a pioneer of behavioral finance, and has worked on behavioral issues for over thirty years. A Behavioral Approach to Asset Pricing is the first behavioral treatment of the pricing kernel. His book Behavioral Corporate Finance is the first textbook dedicated to the application of behavioral concepts to corporate finance. His book Beyond Greed and Fear was the first comprehensive treatment of the field of behavioral finance. A 2003 article appearing in The American Economic Review included him among the top fifteen theorists to have influenced empirical work in microeonomics. One of his articles is among the all time top ten papers to be downloaded from SSRN. He holds a Ph.D. from the London School of Economics, and an honorary doctorate from the University of Oulu in Finland.

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Table of Contents

Preface
Preface to the Second Edition
Chapter 1- Introduction
I Heuristics and Representativeness: Experimental Evidence
Chapter 2- Representativeness and Bayes Rule: Psychological Perspective
Chapter 3- Representativeness and Bayes Rule: Economics Perspective
Chapter 4- A Simple Asset Pricing Model Featuring Representativeness
Chapter 5- Heterogeneous Judgements in Experiments
II Heuristics and Representativeness: Investor Expectations
Chapter 6- Representativeness and Heterogeneous Beliefs Among Individual Investors, Financial Executives, and Academics
Chapter 7- Representativeness and Heterogeneity in the Judgements of Professional Investors
III Developing Behavioral Asset Pricing Models
Chapter 8- A Simple Asset Pricing Model with Heterogeneous Beliefs
Chapter 9- Heterogeneous Beliefs and Inefficient Markets
Chapter 10- A Simple Market Model of Prices and Trading Volume
Chapter 11- Efficiency and Entropy: Long-run Dynamics
IV Heterogeneity in Risk Tolerance and Time Discounting
Chapter 12- CRRA and CARA Utility Functions
Chapter 13- Heterogeneous Risk Tolerance and Time Preference
Chapter 14- Representative Investors in a Heterogeneous CRRA Model
IV Sentiment and Behavioral SDF
Chapter 15- Sentiment
Chapter 16- Behavioral SDF and the Sentiment Premium
VI Applications and Behavioral SDF
Chapter 17- Behavioral Betas and Mean-Variance Portfolios
Chapter 18- Cross-section of Return Expectations
Chapter 19- Testing for a Sentiment Premium
Chapter 20- A Behavioral Approach to the Term Structure of Interest Rates
Chapter 21- Behavioral Black-Scholes
Chapter 22- Irrational Exuberance and Option Smiles
Chapter 23- Empirical Evidence in Support of Behavioral SDF
VII Prospect Theory
Chapter 24- Prospect Theory: Introduction
Chapter 25- Behavioral Portfolios
Chapter 26- Equilibrium with Behavioral Preferences
Chapter 27- Pricing and Prospect Theory: Empirical Studies
Chapter 28- Reflections on the Equity Premium Puzzle
Chapter 29- Continuous Time Behavioral Equilibrium Models
Chapter 30 Conclusion
References

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