 Optimism, volatility and decision-making in stock marketsFrancesco Rocciolo, Andrea Gheno and Chris Brooks International Review of Financial Analysis, 2019, vol. 66, issue C Abstract: In this paper we introduce a new, analytically tractable framework for decision-making under risk in which psychological characteristics related to the degree of optimism or pessimism of the decision-maker are considered. The framework we propose, which is based on a two-parameter optimism weighting function, is applicable to a wide range of decision-making models and renders even the simplest, such as expected utility theory, able to describe the behavior of decision-makers within a more parsimonious framework. In particular, the optimism weighting function that we introduce is formalized as a function of the volatility of the lotteries faced. This simplifies applications of the framework to financial decision-making problems. For the purpose of demonstrating this applicability, we also derive an extension to a well-known asset pricing model to elicit a measure of market sentiment in the U.S. stock market. The results lend support to the relevance of the degree of optimism, both in financial decision-making problems and in the expectations that agents have of excess returns in the market. Keywords: Optimism; Decision-making; Financial markets (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:66:y:2019:i:c:s1057521918306677 DOI: 10.1016/j.irfa.2019.05.007 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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