Salience and Asset Prices

By P. Bordalo, N. Gennaioli, A. Shleifer. 2013

249 citations recorded by the source corpus.

We present a simple model of asset pricing in which payoff salience drives investors' demand for risky assets. The key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets. The model accounts for several puzzles in finance in an intuitive way, including preference for assets with a chance of very high payoffs, an aggregate equity premium, and countercyclical variation in stock market returns.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/f1e8fbcc6c0d1b48557e93e8432bf3bc2193f79d

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In Economics and Econometrics

In Finance

Citations in the corpus

The Worst, the Best, Ignoring All the Rest: The Rank Effect and Trading Behavior (2015, background): “Average extremeness is suggested by the model of Bordalo, Gennaioli, and Shleifer (2013) where certain stocks are salient because they are most different from a benchmark.”
Psychology-based Models of Asset Prices and Trading Volume (2018, background): “Bordalo et al. (2013) present a model of asset prices in which investors evaluate risk according to salience theory.”
The Impact of Salience on Investor Behavior: Evidence from a Natural Experiment (2019, background): “In a corporate finance theoretical models in which the choice set shapes a decision-maker’s attention (Bordalo, Gennaioli, and Shleifer 2012; 2013a; 2013b; Koszegi and Szeidl 2013; Bushong, Rabin, Schwartzstein 2017).”
Why Do Individual Investors Disregard Accounting Information? The Roles of Information Awareness and Acquisition Costs (2018, unknown): “Bordalo et al. (2012, 2013a, 2013b) operationalize salience by focusing on magnitudes, with more extreme magnitudes being more salient. modify (2) to examine whether extreme earnings surprises motivate investors to use earnings news.”
Do-gooders and go-getters: career incentives, selection, and performance in public service delivery (2014, background): “While salience can affect agents' choices even in settings where agents are informed or can easily access information from other sources (Chetty et al., 2009; Bordalo et al., 2013), in our context, the salience policy entirely determines the agents' perception of job attributes when applying.”
Rationality of Choices in Subsidized Crop Insurance Markets (2017, background): “Zhang (2008), Bougherara and Piet (2014) and Pétraud, Boucher and Carter (2015) and have all studied willingness to pay for crop insurance when preferences are loss averse, but did not consider coverage level. The last two of these works have posited prospect-type preferences as a factor in low upta”
Do Managers Overreact to Salient Risks? Evidence from Hurricane Strikes (2017, background): “…drawback is that availability may be affected by the salience of the event, which is specific to the local context in which the risk is estimated (Bordalo et al., 2012b, 2013).1 Contextual factors such as emotional affect, novelty, time proximity, or media coverage increase the salience of an…”
Expectations and Investment (2015, unknown): “Our own approach has been to use psychological models of expectations that incorporate both forward and backward-looking elements (eg Bordalo et al (2013); Gennaioli et al (2015)), but this research is still some way from being ready for a macroeconomic model.”