00Thaler_FM i-xxvi.qxd

The fundamental weakness of such a model comes in explaining volatility: the standard deviations of returns in table 7.13 are mu ...

of this section, but is shared by all consumption-based models with con- stant discount rates.^27 The unrealistically low stock ...

a single risky asset. In a more realistic economy with many risky assets, it is not immediately clear what investors are loss av ...

Appendix Proof of Proposition 1. Proposition 1 is a special case of Proposition 2 with Yt=0 and Ct=Dtfor all t. Proof of Proposi ...

The increase in expected utility from using the alternative strategy is (50) (51) where we have made use of the concavity of ut( ...

in this case. When zt≥1, there is no such problem because losses are penal- ized at a single rate: 2.25 for zt=1, and higher tha ...

References Abel, Andrew, 1990, Asset Prices under Habit Formation and Catching up with the Joneses, American Economic Review, 80 ...

Hansen, Lars P., and Ravi Jagannathan, 1991, Restrictions on Intertemporal Mar- ginal Rates of Substitutions Implied by Asset Re ...

Chapter 6 MYOPIC LOSS AVERSION AND THE EQUITY PREMIUM PUZZLE Shlomo Benartzi and Richard H. Thaler 1.Introduction There is an en ...

of loss aversion. Empirical estimates of loss aversion are typically in the neighborhood of 2, meaning that the disutility of gi ...

(like stocks) and a safe asset that pays a sure 1 percent. By the same logic that applied to Samuelson’s colleague, the attracti ...

first two-thirds of the nineteenth century (because bond returns were high), but over the last one hundred and twenty years, sto ...

For example, a bout of hyperinflation would presumably hurt bonds more than stocks. Another line of research has aimed at relaxi ...

3.Prospect Theory and Loss Aversion The problem with the habit-formation explanation is the stress it places on consumption. The ...

and estimated γto be 0.61 in the domain of gains and 0.69 in the domain of losses. As discussed in the introduction, the use of ...

stocks as he nears retirement and Tapproaches zero. The intuition comes from the notion that when Tis large, the probability tha ...

ranked, from best to worst, and the return is computed at twenty intervals along the cumulative distribution.^9 (This is done to ...

reports most seriously. As a possible evaluation period, one year is at least highly plausible. There are two reasonable questio ...

probabilities are used and the value function is replaced by a piecewise linear form with a loss aversion factor of 2.25 (that i ...

policy choice that presumably could be altered, at least in principle. Fur- thermore, as the charts in figure 6.1 show, stocks b ...