Investor Psychology and Asset Pricing

David Hirshleifer

Research

92 Pages

This paper examines how investor psychology reshapes asset pricing by making expected returns a function of both risk and misvaluation. It argues that shared biases, limited cognition, and imperfect arbitrage can sustain pricing errors, challenging the idea that rational traders consistently restore efficiency.

Key Takeaways

Confidence Exceeds Accuracy: In one experiment, participants’ 98% confidence intervals contained the correct value only 60% of the time.
Momentum Persists: Stocks performing strongly over the prior 3 to 12 months tended to outperform during the following month.
Patterns Cross Markets: Cloud cover was associated with lower daily stock returns across a joint study of 26 national exchanges.
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