Finance and the behavioral prospect : risk, exuberance, and abnormal markets
Author(s)Chen, James Ming
PublisherEast Lansing, Michigan: Palgrave Macmillan, 2016
ISBN / ISSN9783319327105
SeriesQuantitative perspectives on behavioral economics and finance

Physical Dimension

Number of pagesxii, 343 p.
Dimension22 cm.
Other desc.ill.


This book explains how investor behavior, from mental accounting to the combustible interplay of hope and fear, affects financial economics. The transformation of portfolio theory begins with the identification of anomalies. Gaps in perception and behavioral departures from rationality spur momentum, irrational exuberance, and speculative bubbles. Behavioral accounting undermines the rational premises of mathematical finance. Assets and portfolios are imbued with “affect.” Positive and negative emotions warp investment decisions. Whether hedging against intertemporal changes in their ability to bear risk or climbing a psychological hierarchy of needs, investors arrange their portfolios and financial affairs according to emotions and perceptions. Risk aversion and life-cycle theories of consumption provide possible solutions to the equity premium puzzle, an iconic financial mystery. Prospect theory has questioned the cogency of the efficient capital markets hypothesis. Behavioral portfolio theory arises from a psychological account of security, potential, and aspiration.

Table of Content

The Structure of a Behavioral Revolution
Chen, James Ming
Pages 1-28

Mental Accounting, Emotional Hierarchies, and Behavioral Heuristics
Chen, James Ming
Pages 29-56

Higher-Moment Capital Asset Pricing and Its Behavioral Implications
Chen, James Ming
Pages 57-71

Tracking the Low-Volatility Anomaly Across Behavioral Space
Chen, James Ming
Pages 73-92

The Intertemporal Capital Asset Pricing Model: Hedging Investment Risk Across Time
Chen, James Ming
Pages 93-109

Risk Aversion
Chen, James Ming
Pages 111-135

The Equity Risk Premium and the Equity Premium Puzzle
Chen, James Ming
Pages 137-179

Prospect Theory
Chen, James Ming
Pages 181-212

Specific Applications of Prospect Theory to Behavioral Finance
Chen, James Ming
Pages 213-246
Beyond Hope and Fear:Behavioral Portfolio Theory

Chen, James Ming
Pages 247-281
Behavioral Gaps Between Hypothetical Investment Returns and Actual Investor Returns

Chen, James Ming
Pages 283-299
Irrational Exuberance: Momentum Crashes and Speculative Bubbles

Chen, James Ming
Pages 301-322

The Monster and the Sleeping Queen
Chen, James Ming
Pages 323-326


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