loss aversion narrow framing approach to the equity premium puzzle
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loss aversion narrow framing approach to the equity premium puzzle

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Published by National Bureau of Economic Research in Cambridge, Mass .
Written in English

Subjects:

  • Risk perception -- Mathematical models,
  • Rate of return -- Mathematical models

Book details:

Edition Notes

StatementNicholas Barberis, Ming Huang.
SeriesNBER working paper series -- no. 12378., Working paper series (National Bureau of Economic Research) -- working paper no. 12378.
ContributionsHuang, Ming., National Bureau of Economic Research.
The Physical Object
Pagination36 p. :
Number of Pages36
ID Numbers
Open LibraryOL17630697M
OCLC/WorldCa70715998

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This loss-averse behavior causes narrow framing that makes the investor myopic on losses, which is defined by the equity premium puzzle (see Barberis and Huang, ; Mehra and Prescott, Chapter 6•The Loss Aversion/Narrow Framing Approach to the Equity Premium Puzzle risk-freerate,thelowvolatilityofconsumptiongrowth,andthelowcorrelationofstock returns and consumption growth. With some additional structure, it can also match the high volatility and time-series predictability of stock returns. Downloadable! We review a recent approach to understanding the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decision-making under risk in experimental settings. In equilibrium, models that incorporate these ideas can generate a large equity premium and a low and stable risk-free rate, even when consumption growth .   Abstract. We review a recent approach to understanding the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decision-making under risk in experimental settings.

narrow framing” approach to the equity premium puzzle. Given that narrow framing is the more distinctive of the two ingredients, we sometimes abbreviate this to the “narrow framing” approach.2 2 Loss Aversion and Narrow Framing Loss aversion is a central feature of Kahneman and Tversky’s () prospect theory, a. First, a model that incorporates loss aversion and narrow framing can generate a high equity premium while also matchingotheraspects of the data, such as the low and stable risk-free rate, the low volatility of consumption growth, and the low correlation of stock returns and consumption growth. Chapter 6 • The Loss Aversion/Narrow Framing Approach to the Equity Premium Puzzle Benartzi and Thaler () argue that, in equilibrium, their investor charges a high equity premium. The reason is that the high volatility of stock returns leads to substantial volatility in returns on financial wealth. Andy Abel's paper discusses the role of preferences with consumption externalities, leveraged equity claims, and non-rational expectations in explaining the equity premium puzzle. The “equity premium puzzle” is a term that is now used to define a year-old literature, started by Mehra and Prescott (). In many ways, the search for an answer to this puzzle did for the asset pricing field what the famous .

CiteSeerX - Document Details (Isaac Councill, Lee Giles, Pradeep Teregowda): We review one recent approach to the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decisionmaking under risk in experimental settings. In equilibrium, models that incorporate these ideas can generate a large equity premium and a low and . One behavioral theory by Shlomo Benartzi and Richard Thaler attributes the equity premium puzzle to what’s known as myopic loss aversion (MLA) – the idea that loss-averse investors (as all investors are) take too short-term a view of their investments, leading them to react overly negatively to short-term losses. Since investors are especially worried about losses, they need to know that equities have high . BibTeX @MISC{Barberis06theloss, author = {Nicholas C. Barberis and Ming Huang}, title = { The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle}, year = {}}.   Shlomo Benartzi and Richard Thaler, authors of the study Myopic Loss Aversion and the Equity Premium Puzzle, which was published in the February edition of The Quarterly Journal of Economics, proposed that the puzzle’s answer can be found in the behavior known as myopic loss aversion (MLA), which describes the tendency of investors who are loss-averse (the pleasure felt .