Investor Psychology and Asset Pricing

By David A. Hirshleifer. 2001

2,475 citations recorded by the source corpus.

The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.Presentation slides: https://ssrn.com/abstract=3181614.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/61699d423f31b73f4d430281e62bba426a22a32e

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Citations in the corpus

Portfolio Choice and Risk Attitudes: An Experiment (2003, neutral): “On the other hand, Hirshleifer (2001) points out that “economists such as Adam Smith, Irving Fisher, John Maynard Keynes, and Harry Markowitz thought that individual psychology affects prices,” (p. 1) and concludes that “psychology-based asset pricing theory has promise of capturing [human…”
Predictability in Financial Markets: What do Survey Expectations Tell Us? (2009, neutral): “At the same time other explanations of predictability of expectational errors cannot be ruled out, for example based on psychological behavior (see Hirshleifer (2001) for a survey).”
Nationalism and Economic Exchange: Evidence from Shocks to Sino-Japanese Relations (2014, background): “investor sentiment in the form of either overreaction (Daniel, Hirshleifer, and Subrahmanyam 1998; Hirshleifer 2001; Daniel, Hirshleifer, and Teoh 2002) or shifts in preferences over asset allocation (Bikhchandani, Hirshleifer, and Welch 1992).”
Hard-to-Value Stocks, Behavioral Biases, and Informed Trading (2009, neutral): “In particular, Hirshleifer (2001) conjectures that: . . . people are likely to be more prone to bias in valuing securities for which information is sparse.”
Financial reporting complexity and investor underreaction to 10-K information (2009, neutral): “Hirshleifer (2001) argues that information that is presented in a cognitively costly form is”
Ambiguity in asset pricing and portfolio choice: a review of the literature (2010, neutral): “ =  +  − 1 2 (1 + )( + )(2)  (64)”
Sports Sentiment and Stock Returns (2007, neutral): “We also document a loss effect after international cricket, rugby, and basketball games.”
The Association Between Management Earnings Forecast Errors and Accruals (2009, background): “In addition, uncertainty in the operating environment can induce or exacerbate managers’ cognitive biases in processing information (e.g., Hirshleifer 2001; Zhang 2006), which also leads to errors in managers’ assessments of business prospects.”
Exploitable Predictable Irrationality: The FIFA World Cup Effect on the U.S. Stock Market (2010, neutral): “For a comprehensive survey of the literature on behavioral biases and their influence on the stock market, see Shiller (2000), Hirshleifer (2001) and Shefrin (2002).”
An examination of investor sentiment effect on G7 stock market returns (2013, neutral): “Hence, we examined the significance of ∆VWD by incorporating industry-return indices along with aggregate market returns (see model 2 in Table 9).(38) We found significant ∆VWD for both value stocks and growth stocks at 5% and 1% levels, respectively.”
Herd Behaviour and Cascading in Capital Markets: A Review and Synthesis (2003, background): “…immediately that fully rational models of cascades or herding cannot explain anomalous evidence regarding return predictability or excess volatility (for recent reviews of theory and evidence relating to investor psychology in capital markets, see, e.g., Hirshleifer (2001), Daniel et al. (2002)).”
Fast profits: Investor sentiment and stock returns during Ramadan (2012, methodology): “see Hirshleifer (2001), and Lucey and Dowling (2005).”