Psychology-based Models of Asset Prices and Trading Volume

Nicholas C. Barberis

No 24723, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Behavioral finance tries to make sense of financial data using models that are based on psychologically accurate assumptions about people's beliefs, preferences, and cognitive limits. I review behavioral finance approaches to understanding asset prices and trading volume, with particular emphasis on three types of models: extrapolation-based models, models of overconfident beliefs, and models of gain-loss utility inspired by prospect theory. The research to date shows that a few simple assumptions about investor psychology capture a wide range of facts about prices and volume and lead to concrete new predictions. I end by speculating about the form that a unified psychology-based model of investor behavior might take.

JEL-codes: G11 G12 G40 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-neu and nep-upt
Note: AP
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