Salience and Asset Prices
13 Pages Posted: 18 Jan 2013 Last revised: 13 Feb 2022
Date Written: January 2013
Abstract
We present a simple model of asset pricing in which payoff salience drives investors' demand for risky assets. The key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets. The model accounts for several puzzles in finance in an intuitive way, including preference for assets with a chance of very high payoffs, an aggregate equity premium, and countercyclical variation in stock market returns.
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