Abstract

http://ssrn.com/abstract=649421
 
 

References (18)



 
 

Citations (146)



 


 



Stocks as Lotteries: the Implications of Probability Weighting for Security Prices


Nicholas Barberis


Yale School of Management; National Bureau of Economic Research (NBER)

Ming Huang


Cornell University - Samuel Curtis Johnson Graduate School of Management

February 2007

AFA 2005 Philadelphia Meetings Paper

Abstract:     
We study the asset pricing implications of Tversky and Kahneman's (1992) cumulative prospect theory, with particular focus on its probability weighting component. Our main result, derived from a novel equilibrium with non-unique global optima, is that, in contrast to the prediction of a standard expected utility model, a security's own skewness can be priced: a positively skewed security can be overpriced, and can earn a negative average excess return. Our results offer a unifying way of thinking about a number of seemingly unrelated financial phenomena, such as the low average return on IPOs, private equity, and distressed stocks; the diversification discount; the low valuation of certain equity stubs; the pricing of out-of-the-money options; and the lack of diversification in many household portfolios.

Number of Pages in PDF File: 49

Keywords: prospect theory, asset pricing, skewness, under-diversification

JEL Classification: D1, D8, G11, G12

working papers series


Download This Paper

Date posted: January 16, 2005  

Suggested Citation

Barberis, Nicholas and Huang, Ming, Stocks as Lotteries: the Implications of Probability Weighting for Security Prices (February 2007). AFA 2005 Philadelphia Meetings Paper. Available at SSRN: http://ssrn.com/abstract=649421 or http://dx.doi.org/10.2139/ssrn.649421

Contact Information

Nicholas Barberis (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-436-0777 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Ming Huang
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
607-225-9594 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 2,840
Downloads: 717
Download Rank: 16,969
References:  18
Citations:  146

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.250 seconds