Salience and Asset Prices

Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer

doi:10.1257/aer.103.3.623

Salience and Asset Prices

Pedro Bordalo¹; Nicola Gennaioli²; Andrei Shleifer³

¹ Royal Holloway, University of London, Economics Department, Egham Hill, Egham, TW20 0EX, UK. · ² Universita Bocconi, Department of Finance, Via Roentgen 1, Milan, Italy. · ³ Harvard University, Economics Department, Littauer Center, 1805 Cambridge Street, Cambridge, MA 02138 USA.

American Economic Review 2013 open access

We present a simple model of asset pricing in which payoff salience drives investors' demand for risky assets. The key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets. The model accounts for several puzzles in finance in an intuitive way, including preference for assets with a chance of very high payoffs, an aggregate equity premium, and countercyclical variation in stock market returns.

DOI: 10.1257/aer.103.3.623
Volume: 103 (3)
Pages: 623-628
Language: en
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