Advances in Behavioral Finance, Volume II / Edition 1

by Richard H. Thaler

Overview

This book offers a definitive and wide-ranging overview of developments in behavioral finance over the past ten years. In 1993, the first volume provided the standard reference to this new approach in finance—an approach that, as editor Richard Thaler put it, "entertains the possibility that some of the agents in the economy behave less than fully rationally some of the time." Much has changed since then. Not least, the bursting of the Internet bubble and the subsequent market decline further demonstrated that financial markets often fail to behave as they would if trading were truly dominated by the fully rational investors who populate financial theories. Behavioral finance has made an indelible mark on areas from asset pricing to individual investor behavior to corporate finance, and continues to see exciting empirical and theoretical advances.



Advances in Behavioral Finance, Volume II constitutes the essential new resource in the field. It presents twenty recent papers by leading specialists that illustrate the abiding power of behavioral finance—of how specific departures from fully rational decision making by individual market agents can provide explanations of otherwise puzzling market phenomena. As with the first volume, it reaches beyond the world of finance to suggest, powerfully, the importance of pursuing behavioral approaches to other areas of economic life.


The contributors are Brad M. Barber, Nicholas Barberis, Shlomo Benartzi, John Y. Campbell, Emil M. Dabora, Daniel Kent, François Degeorge, Kenneth A. Froot, J. B. Heaton, David Hirshleifer, Harrison Hong, Ming Huang, Narasimhan Jegadeesh, Josef Lakonishok, Owen A. Lamont, Roni Michaely, Terrance Odean, Jayendu Patel, Tano Santos, Andrei Shleifer, Robert J. Shiller, Jeremy C. Stein, Avanidhar Subrahmanyam, Richard H. Thaler, Sheridan Titman, Robert W. Vishny, Kent L. Womack, and Richard Zeckhauser.

Product Details

ISBN-13:	9780691121758
Publisher:	Princeton University Press
Publication date:	07/25/2005
Series:	The Roundtable Series in Behavioral Economics , #2
Edition description:	New Edition
Pages:	744
Product dimensions:	6.00(w) x 9.25(h) x (d)

About the Author

Richard H. Thaler, the winner of the 2017 Nobel Prize in economics, is the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. His books include Quasi-Rational Economics (Russell Sage Foundation) and The Winner's Curse (Princeton). He is also the editor of the forerunner to the present volume, Advances in Behavioral Finance (Russell Sage Foundation).

Table of Contents

Preface xi
Richard H. Thaler
Acknowledgments xix
List of Abbreviations xxiii
Chapter 1: A Survey of Behavioral Finance by Nicholas Barberis and Richard H. Thaler 1

Part I: Limits to Arbitrage

Chapter 2: The Limits of Arbitrage by Andrei Shleifer and Robert W. Vishny 79
Chapter 3: How Are Stock Prices Affected by the Location of Trade? by Kenneth A. Froot and Emil M. Dabora 102
Chapter 4: Can the Market Add and Subtract? Mispricing in Tech Stock Carve-outs by Owen A. Lamont and Richard H. Thaler 130

Part II: I Stock Returns and the Equity Premium

Chapter 5: Valuation Ratios and the Long-run Stock Market Outlook: An Update by John Y. Campbell and Robert J. Shiller 173
Chapter 6: Myopic Loss Aversion and the Equity Premium Puzzle by Shlomo Benartzi and Richard H. Thaler 202
Chapter 7: Prospect Theory and Asset Prices by Nicholas Barberis, Ming Huang, and Tano Santos 224

Part III: Empirical Studies of Overreaction and Underreaction

Chapter 8: Contrarian Investment, Extrapolation, and Risk by Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny 273
Chapter 9: Evidence on the Characteristics of Cross-sectional Variation in Stock Returns by Kent Daniel and Sheridan Titman 317
Chapter 10: Momentum by Narasimhan Jegadeesh and Sheridan Titman 353
Chapter 11: Market Efficiency and Biases in Brokerage Recommendations by Roni Michaely and Kent L. Womack 389

Part IV: Theories of Overreaction and Underreaction

Chapter 12: A Model of Investor Sentiment by Nicholas Barberis, Andrei Shleifer, and Robert W. Vishny 423
Chapter 13: Investor Psychology and Security Market Under- and Overreaction by Kent Daniel, David Hirshleifer, and Avanidhar Subrahmanyam 460
Chapter 14: A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets by Harrison Hong and Jeremy C. Stein 502

Part V: Investor Behavior

Chapter 15: Individual Investors by Brad M. Barber and Terrance Odean 543
Chapter 16: Naive Diversification Strategies in Defined Contribution Savings Plans by Shlomo Benartzi and Richard H. Thaler 570

Part VI: Corporate Finance

Chapter 17: Rational Capital Budgeting in an Irrational World by Jeremy C. Stein 605
Chapter 18: Earnings Management to Exceed Thresholds by François Degeorge, Jayendu Patel, and Richard Zeckhauser 633
Chapter 19: Managerial Optimism and Corporate Finance by J. B. Heaton 667

List of Contributors 685
Index 695

What People are Saying About This

David Laibson

This book provides a thorough review of progress in the field of behavioral finance over the past ten years. By every measure, it will have considerable impact. It is must reading for finance economists as well as anyone interested in behavioral economics. Graduate students and faculty alike will find this book to be an invaluable reference to which they will often refer.
— David Laibson, Harvard University

Ritter

This book brings together almost all of the most important work in behavioral finance from the last decade, in a manageable presentation suitable for masters- and doctoral-level classes on the subject.
— Jay R. Ritter, Cordell Professor of Finance, University of Florida

From the Publisher

"This book provides a thorough review of progress in the field of behavioral finance over the past ten years. By every measure, it will have considerable impact. It is must reading for finance economists as well as anyone interested in behavioral economics. Graduate students and faculty alike will find this book to be an invaluable reference to which they will often refer."—David Laibson, Harvard University

"Advances in Behavioral Finance, Volume II should be on every Ph.D. reading list in finance programs. It should be seen as a finance book per se, not just a niche 'behavioral finance' book. Thaler's preface is very readable, as is the superb introduction by Thaler and Nick Barberis."—Colin Camerer, California Institute of Technology, author of Behavioral Game Theory and Advances in Behavioral Economics

"This book brings together almost all of the most important work in behavioral finance from the last decade, in a manageable presentation suitable for masters- and doctoral-level classes on the subject."—Jay R. Ritter, Cordell Professor of Finance, University of Florida

Colin Camerer

Advances in Behavioral Finance, Volume II should be on every Ph.D. reading list in finance programs. It should be seen as a finance book per se, not just a niche 'behavioral finance' book. Thaler's preface is very readable, as is the superb introduction by Thaler and Nick Barberis.
— Colin Camerer, California Institute of Technology, author of "Behavioral Game Theory" and "Advances in Behavioral Economics"

Editorial Reviews

Richard H. Thaler, Winner of the 2017 Nobel Prize in Economics

From the Publisher

This is an excellent and useful book which should be recommended to all students of finance.

Economic Issues - Peter Howells

This is an excellent and useful book which should be recommended to all students of finance.
— Peter Howells

Economic Issues

A collection of 21 recent articles that illustrate the power of a new approach to finance, one which as editor Thaler puts it, "entertains the possibility that some of the agents in the economy behave less than fully rationally some of the time." These papers illustrate how specific departures from fully rational decisionmaking by individual market agents can provide explanations of otherwise puzzling market phenomena. Annotation c. Book News, Inc., Portland, OR (booknews.com)

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