Footnotes (13)



Disappointment, Pessimism and the Equity Risk Premia

Thierry Chauveau

National Center for Scientific Research (CNRS)

Nicolas Nalpas

Toulouse Business School

March 1, 2002

EFA 2002 Berlin Meetings Presented Paper

We analyze the implications of the introduction of disappointment averse agents on the financial markets. The underlying intuition is that agents take account for the potential disappointment of their decisions, in particular when they invest on the stock market. After having defined the concepts of disappointment aversion, we show that in our framework a disappointment averse agent is pessimistic. We then explore the consequences of disappointment aversion and pessimism on the CAPM and the C-CAPM. We finally study a Lucas asset pricing model that is standard, except that the representative agent is supposed to be disappointment averse. Using a constant marginal utility function, we show that the model can account for both large equity risk premia and low risk-free rates. It may so be viewed as a solution to the equity premium puzzle

Number of Pages in PDF File: 29

Keywords: Behavorial Finance, Disappointment, Equity Premium

JEL Classification: D81, G12

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Date posted: March 22, 2002  

Suggested Citation

Chauveau , Thierry and Nalpas, Nicolas, Disappointment, Pessimism and the Equity Risk Premia (March 1, 2002). EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: http://ssrn.com/abstract=302930 or http://dx.doi.org/10.2139/ssrn.302930

Contact Information

Thierry Chauveau
National Center for Scientific Research (CNRS) ( email )
3, rue Michel-Ange
Paris cedex 16, 75794
33 1 44 07 82 68 (Phone)
33 1 44 07 82 70 (Fax)
Nicolas Nalpas (Contact Author)
Toulouse Business School ( email )
20, bd Lascrosses
Toulouse, 31068
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