This paper studies asset pricing under expectations‐based reference‐dependent preferences in a general equilibrium framework. We show that reference‐dependent preferences can generate self‐fulfilling risk panics, producing sentiment‐driven asset price fluctuations through a feedback loop between current prices and perceived future downside risk—dynamics impossible under standard expected utility. The model helps explain empirical puzzles including (i) excess volatility, (ii) asymmetric volatility, (iii) asymmetric sentiment over the business cycle, (iv) excess asset price comovement, and (v) weak correlations between stock returns and economic fundamentals, alongside a sizable equity premium. Additional empirical evidence based on closed‐end fund discounts and quantitative analysis support the theory.