"I propose here the psychological attraction theory of financial regulation - that regulation is the result of psychological biases on the part of political participants - voters, politicians, bureaucrats, and media commentators; and of regulatory ideologies that exploit these biases. Some key...

According to prospect theory (Kahneman & Tversky, 1979), gains and losses are measured from current wealth, which serves as 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...

This paper examines some policy issues related to the interaction between internal and external corporate control mechanisms-board dismissals and takeovers-by focusing on the information aggregation and other effects related to this interaction. We model the functioning of corporate control...

We offer a model in which sequences of individuals often converge upon poor decisions and are prone to fads, despite communication of the payoff outcomes from past choices. This reflects both direct and indirect action-based information externalities. In contrast with previous cascades...

An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to hollow the behavior of the preceding person without regard to his own information. Among the phenomena that can be explained by informational cascades are conformism at...

We examine how investor preferences and beliefs affect trading in relation to past gains and losses. The probability of selling as a function of profit is V-shaped; at short holding periods, investors are more likely to sell big losers than small ones. There is little evidence of an upward jump in...

We offer an explanation for the forward premium puzzle in foreign exchange markets based upon investor overconfidence. In the model, overconfident individuals overreact to their information about future inflation, which causes greater overshooting in the forward rate than in the spot rate. Thus,...

Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. We use equity and debt financing to identify common misvaluation across firms. A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue firms...

Evidence indicates that people fear change and the unknown. We model this behavior as familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains portfolio underdiversification, home and local biases. More importantly,...