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A Behavioral Approach to Asset Pricing - 1st Edition - ISBN: 9780080476032

A Behavioral Approach to Asset Pricing

1st Edition

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Authors: Hersh Shefrin
eBook ISBN: 9780080476032
Imprint: Academic Press
Published Date: 3rd February 2005
Page Count: 496
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Table of Contents

Chapter 1- Introduction Chapter 2- Representativeness and Bayes Rule: Psychological Perspective Chapter 3- Representativeness and Bayes Rule: Economics Perspective Chapter 4- A Simple Asset Pricing Model Featuring Representativeness Chapter 5- Heterogeneous Judgements in Experiments Chapter 6- Representativeness and Heterogeneous Beliefs Among Individual Investors, Financial Executives and Academics Chapter 7- Representativeness and Heterogeneity in the Judgements of Professional Investors Chapter 8- A Simple Asset Pricing Model with Heterogeneous Beliefs Chapter 9- Heterogeneous Beliefs and Inefficient Markets Chapter 10- A Simple Market Model of Prices and Trading Volume Chapter 11- Efficiency and Entropy: Long-run Dynamics Chapter 12- CRRA and CARA Utility Functions Chapter 13- Heterogeneous Risk Tolerance and Time Preference Chapter 14- Representative Investors in a Heterogeneous CRRA Model Chapter 15- Sentiment Chapter 16- Behavioral SDF and the Sentiment Premium Chapter 17- Behavioral Betas and Mean-Variance Portfolios Chapter 18- Cross-section of Return Expectations Chapter 19- Testing for a Sentiment Premium Chapter 20- A Behavioral Approach to the Term Structure of Interest Rates Chapter 21- Behavioral Black-Scholes Chapter 22- Irrational Exuberance and Option Smiles Chapter 23- Empirical Evidence In Support of Behavioral SDF Chapter 24- Prospect Theory: Introduction Chapter 25- Behavioral Portfolios Chapter 26- Prospect Theory Equilibrium Chapter 27- Pricing and Prospect Theory: Empirical Studies Chapter 28- Reflections on the Equity Premium Puzzle Chapter 29- Conclusion


A Behavioral Approach to Asset Pricing Theory examines the reigning assumptions of asset pricing theory and reconstructs them to incorporate findings from behavioral finance. It constructs a solid, intact structure that challenges classic assumptions and at the same time provides a strong theory and efficient empirical tools.

Building on the models developed by both traditional asset pricing theorists and behavioral asset pricing theorists, this book takes the discussion to the next step. The author provides a general behaviorally based intertemporal treatment of asset pricing theory that extends to the discussion of derivatives, fixed income securities, mean-variance efficient portfolios, and the market portfolio.

The book develops a series of examples to illustrate the theoretical results. The CD-ROM contains most of the examples, worked out as Excel spreadsheets, so that a diligent reader can follow them through. Instructors might also want to use the examples to assign class exercises, asking students to modify the numbers and see what happens.

Key Features

  • The first book to focus completely on how behavioral finance principles affect asset pricing
  • Hersh Shefrin is a recognized expert in behavioral finance
  • Behavioral finance is a growth area in finance scholarship and moving more and more into practice


Graduate students and professors in finance, and professionals working with investment tools such as financial analysts and portfolio managers.


No. of pages:
© Academic Press 2005
3rd February 2005
Academic Press
eBook ISBN:


"This book provides a much-needed bridge between behavioral finance and traditional asset pricing theory, so that the insights from the two fields offer can complement each other. This book will make the theory of behavioral finance far more useful and broadly applicable." --Bob Shiller, Cowles Foundation for Research in Economics, International Center for Finance, Yale University "I highly recommend Shefrin's book to anyone who wants to probe into the implications of behavioral finance for asset pricing. Shefrin builds rigorous theoretical models that integrate investor heterogeneity and psychological biases into the traditional stochastic discount factor framework. The text contains a wealth of original ideas, and provides new modeling tools. The results are convincing and thought provoking. I believe Shefrin's book will help revolutionize our thinking about asset pricing and stimulate more work along its line." --Bing Han, Assistant Professor of Finance, the Ohio State University "Shefrin presents a rigorous, analytical treatment of asset pricing with behaviorally-motivated investor heterogeneity. Written ahead of its time, this is a good book for doctoral students or any scholar with a serious scientific interest in this emerging subfield of finance." -- Wayne Ferson, Collins Chair in Finance, Carroll School of Management, Boston College "Students and researchers interested in this important and burgeoning field of finance should read A Behavioral Approach to Asset Pricing." - Financial Analysts Journal

Ratings and Reviews

About the Authors

Hersh Shefrin

Hersh Shefrin holds the Mario L. Belotti Chair in the Department of Finance at Santa Clara University's Leavey School of Business. He is a pioneer of behavioral finance, and has worked on behavioral issues for over thirty years. A Behavioral Approach to Asset Pricing is the first behavioral treatment of the pricing kernel. His book Behavioral Corporate Finance is the first textbook dedicated to the application of behavioral concepts to corporate finance. His book Beyond Greed and Fear was the first comprehensive treatment of the field of behavioral finance. A 2003 article appearing in The American Economic Review included him among the top fifteen theorists to have influenced empirical work in microeonomics. One of his articles is among the all time top ten papers to be downloaded from SSRN. He holds a Ph.D. from the London School of Economics, and an honorary doctorate from the University of Oulu in Finland.

Affiliations and Expertise

Mario L. Belotti Professor of Finance, Leavey School of Business, Santa Clara University, CA, USA