Prospect Theory and Stock Market Anomalies

Author: Nicholas Barberis, Lawrence J. Jin, Baolian Wang

We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 23 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of its volatility, skewness, and capital gain overhang. We find that the model is helpful for thinking about a majority of the 23 anomalies.

Barberis, Nicholas and Barberis, Nicholas and Jin, Lawrence J. and Wang, Baolian, Prospect Theory and Stock Market Anomalies (December 16, 2020). 10th Miami Behavioral Finance Conference, Available at SSRN: or

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