Anchoring Heuristic and the Equity Premium Puzzle

Hammad Siddiqi

MPRA Paper from University Library of Munich, Germany

Abstract: I model a scenario in which investors do not know the payoff distributions of relatively newer firms and use the payoff distribution of similar well-established firms as starting points. The starting distributions are then adjusted for size, volatility, and other differences. Anchoring bias (Tversky and Kahneman (1974)) implies that such adjustments typically fall short. I show that adjusting consumption CAPM for anchoring provides a unified explanation for 9 asset pricing puzzles including the equity premium puzzle. The anchoring approach achieves these explanations while maintaining the tractable framework of a representative agent with time additive preferences in a complete market.

Keywords: The Equity Premium Puzzle; Anchoring Bias; The Risk-Free Rate Puzzle; Countercyclical Equity Premium; Stock Price Volatility; Knightian Uncertainty (search for similar items in EconPapers)
JEL-codes: D8 D80 D81 G11 G12 (search for similar items in EconPapers)
Date: 2015-11-01
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https://mpra.ub.uni-muenchen.de/69835/1/MPRA_paper_69835.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:68537

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