W consider choice over uncertain, monetary payoffs and study a general class of preferences. These preferences favor diversification, except perhaps on a subset of sufficiently disliked acts over which concentration is instead preferred. This structure encompasses a number of known models (e.g., expected utility and several variants under a concave utility function). We show that such preferenc...

Behavioral science has made a considerable contribution to finance. To gain an understanding of the scientific contributions emerging from all fields finance with behavioral perspective, this paper reviews content major journal dedicated finance, Journal and Experimental Finance (JBEF), since its foundation 8 years ago. For purpose, we employ bibliometrics analysis shed light on publication tre...

Expected utility functions are limited to second-order (conditional) risk aversion, while non-expected utility functions can exhibit either first-order or second-order (conditional) risk aversion. We extend the concept of orders of conditional risk aversion to orders of conditional dependent risk aversion. We show that first-order conditional dependent risk aversion is consistent with the frame...

Diversification represents the idea of choosing variety over uniformity. Within the theory of choice, desirability of diversification is axiomatized as preference for a convex combination of choices that are equivalently ranked. This corresponds to the notion of risk aversion when one assumes the von-Neumann-Morgenstern expected utility model, but the equivalence fails to hold in other models. ...

This technical appendix is comprised of three sections. The first provides step-by-step mathematical guidance on how to solve the model. It derives expected utility, expected portfolio holdings, the strategic substitutability and equilibrium uniqueness results, and the cost of foreign information in the model without increasing returns. The second section explores the model’s assumptions. It lo...

Loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion. The intuition is that the different utility impact of wealth gains and losses leads loss-averse investors to behave similarly to investors with high risk aversion. But if so, should these agents not perceive larger gains from international diversification than standard ex...

The purpose of this note is to describe a risk management procedure applicable to options on large credit portfolios such as CDO tranches on iTraxx or CDX. Credit spread risks are dynamically hedged using single name defaultable claims while default risk is kept under control thanks to diversification. The proposed risk management approach mixes ideas from finance and insurance and departs from...

Economists studying choice with partial knowledge typically assume that the decision maker places a subjective distribution on unknown quantities and maximizes expected utility. Someone lacking a subjective distribution faces a problem of choice under ambiguity. This article reviews recent research on policy choice under ambiguity, when the task is to choose treatments for a population. Ambigui...

participants of MFA and FMA conferences for helpful comments. The paper was previously titled The Physical Foundation of Human Psychology and Behavioral Finance.

The online version of A Behavioral Approach to Asset Pricing by Hersh Shefrin. Part III: Developing Behavioral Asset Pricing Models.A unified behavioral approach to asset pricing requires a general definition of sentiment. Objective pdf and the individual investors subjective pdf. ÂœA mathematical-economist-turned-behavioral-economist, Hersh Shefrin challenges and delights the reader by applyin...