According to prospect theory (Kahneman amp; Tversky, 1979), gains and losses are measured from a reference point. We attempted to ascertain to what extent the reference point shifts following gains or losses. In questionnaire studies we asked subjects what stock price today will generate the...

This paper develops the theoretical predictions that when investor overreaction to market-wide information is larger, firm valuations in the cross-section become more dispersed, and stocks on average earn lower expected returns. Consistent with the model prediction, I find that my measure of...

We propose a novel human capital model that decomposes aggregate income risk into high- and low-income risk. We find that high-income risk is priced, while low-income risk is insignificant. The high-income factor alone explains 77% of the cross-sectional variation in the twenty-five size and...

This paper examines whether a New Year's gambling preference of individual investors impacts prices and returns of assets with lottery features. We find that, in January, call options have higher demand than put options, especially among small investors. In addition, relative to at-the-money...

Behavioral theories predict that firm valuation dispersion in the cross-section (“dispersion”) measures aggregate overpricing caused by investor overconfidence and should be negatively related to expected aggregate returns. This paper develops and tests these hypotheses. Consistent with the...

Using three natural experiments, we test the hypothesis that investor overconfidence produces overpricing of high idiosyncratic volatility stocks in the presence of binding short-sale constraints. We study three events: IPO lockup expirations, option introductions, and the 2008 short-sale ban on...

This paper shows that a New Year's gambling preference of individual investors impacts prices and returns of assets with lottery features. January call options, especially the out-of-the-money calls, have higher retail demand and are the most expensive and actively traded. Lottery-type stocks...

Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. This paper uses equity financing to identify comovement in returns and commonality in misvaluation. A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from...

The underperformance of high idiosyncratic volatility stocks, as documented by Ang, Hodrick, Ying, and Zhang (2006, JF), is a pure non-January phenomenon. This non-January negative relation between idiosyncratic volatility and stock returns is more pronounced among firms with greater constraints...