Investors' individual arbitrage models introduce idiosyncratic risk into complex asset strategies, driving up average returns and Sharpe ratios. However, despite the attractive risk‐return trade‐off, participation is limited. This is because effective Sharpe ratios in complex asset markets vary with investors' expertise. Investors with higher expertise, better models, and lower resulting idiosyncratic risk exposures realize higher Sharpe ratios. Their demand deters entry by less sophisticated investors. As predicted by our model, market dislocations are characterized by an increase in idiosyncratic risk, investor exit, and persistently elevated alphas and Sharpe ratios. The selection effect from higher expertise agents' more favorable Sharpe ratios is unique to our model and key to our main results.

We present a simple, linear asset pricing model of the cross section of Mortgage‐Backed Security (MBS) returns. MBS earn risk premia as compensation for their exposure to prepayment risk. We measure prepayment risk and estimate risk loadings using prepayment forecasts versus realizations. Estimated loadings on prepayment risk decrease monotonically in securities' coupons relative to the par coupon, consistent with the predicted effect of prepayment on bond value. Prepayment risk appears to be priced by specialized MBS investors. The price of prepayment risk changes sign over time with the sign of a representative MBS investor's exposure to prepayment shocks.

Trading volume of infinitely lived securities, such as equity, is generically zero in Lucas asset pricing models with heterogeneous agents. More generally, the end‐of‐period portfolio of all securities is constant over time and states in the generic economy. General equilibrium restrictions rule out trading of equity after an initial period. This result contrasts the prediction of portfolio allocation analyses that portfolio rebalancing motives produce nontrivial trade volume. Therefore, other causes of trade must be present in asset markets with large trading volume.

We examine the returns of stocks in Cowles Industrial Index before and after the introduction of personal income taxes in 1917. This is distinct from earlier studies because we cross‐sectionally analyze the relationship between the returns of the individual stocks and measures of tax‐loss selling potential and size. We find that excess returns at the turn‐of‐the‐year and for the month of January were not significant until after 1917. These results provide strong support for the tax‐loss selling hypothesis as an explanation for the January seasonal in the returns of small firms.

Women’s reluctance to negotiate is often used to explain the gender wage gap, popularizing the push for women to “lean in” and negotiate more. Examining an environment in which women achieve positive profits when they choose to negotiate, we find that increased negotiations are not helpful. Women know when to ask: they enter negotiations resulting in positive profits and avoid negotiations resulting in negative profits. While the findings are similar for men, we find no evidence that men are more adept than women at knowing when to ask. Thus, our results caution against a greater push for women to negotiate.