A Behavioral Approach to Asset Pricing

Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is increasingly becoming the common way of understanding investor behavior and stock market activity. Incorporating the latest research and theory, Shefrin offers both a strong theory and efficient empirical tools that address derivatives, fixed income securities, mean-variance efficient portfolios, and the market portfolio. The book provides a series of examples to illustrate the theory.

The second edition continues the tradition of the first edition by being the one and only book to focus completely on how behavioral finance principles affect asset pricing, now with its theory deepened and enriched by a plethora of research since the first edition

1. Introduction

I Heuristics and Representativeness: Experimental Evidence 2. Representativeness and Bayes Rule: Psychological Perspective 3. Representativeness and Bayes Rule: Economics Perspective 4. A Simple Asset Pricing Model Featuring Representativeness 5. Heterogeneous Judgements in Experiments

II Heuristics and Representativeness: Investor Expectations 6. Representativeness and Heterogeneous Beliefs Among Individual Investors, Financial Executives, and Academics 7. Representativeness and Heterogeneity in the Judgements of Professional Investors

III Developing Behavioral Asset Pricing Models 8. A Simple Asset Pricing Model with Heterogeneous Beliefs 9. Heterogeneous Beliefs and Inefficient Markets 10. A Simple Market Model of Prices and Trading Volume 11. Efficiency and Entropy: Long-run Dynamics

IV Heterogeneity in Risk Tolerance and Time Discounting 12. CRRA and CARA Utility Functions 13. Heterogeneous Risk Tolerance and Time Preference 14. Representative Investors in a Heterogeneous CRRA Model

IV Sentiment and Behavioral SDF 15. Sentiment 16. Behavioral SDF and the Sentiment Premium

VI Applications and Behavioral SDF 17. Behavioral Betas and Mean-Variance Portfolios 18. Cross-section of Return Expectations 19. Testing for a Sentiment Premium 20. A Behavioral Approach to the Term Structure of Interest Rates 21. Behavioral Black-Scholes 22. Irrational Exuberance and Option Smiles  23. Empirical Evidence in Support of Behavioral SDF

VII Prospect Theory 24. Prospect Theory: Introduction 25. Behavioral Portfolios  26. Equilibrium with Behavioral Preferences 27. Pricing and Prospect Theory: Empirical Studies 28. Reflections on the Equity Premium Puzzle 29. Continuous Time Behavioral Equilibrium Models 30. Conclusion