This paper develops a model of weight assignments using a pseudo-Bayesian approach that reflects investors’ behavioral biases. In this parsimonious model of investor sentiment, weights induced by investors’ conservative and representative heuristics are assigned to observations of the earning shocks of stock prices. Such weight assignments enable us to provide a quantitative link between some m...

When risks threaten, cognitivemechanismsbias people toward actionor inaction. Fearsome risks are highly available. The availability bias tells us that this leads people to overestimate their frequency. Therefore, they also overreact to curtail the likelihood or consequences of such risks. More generally, fear can paralyze efforts to think clearly about risks. We draw on a range of environmental...

When x-rays were first discovered, the harmful effects of radiation had to be manifest in the early users before they were known. Today, radiation protection and safety have been established and the effects of radiation, as well as its risks, are known. Even so, medical radiation, in particular the growth in the use of computed tomography (CT), has resulted in soaring radiation doses received b...

Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is base...