Working Paper: NBER ID: w18708
Authors: Pedro Bordalo; Nicola Gennaioli; Andrei Shleifer
Abstract: 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.
Keywords: salience; asset pricing; investor behavior; equity premium
JEL Codes: D84; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Extreme Payoffs (J33) | Market Valuation (G19) |
| Salience (D91) | Asset Demand (G19) |
| Salience (D91) | Preference for High Payoff Assets (G11) |
| Salience (D91) | Overvaluation of High Payoff Assets (G19) |
| Salience (D91) | Growth-Value Puzzle (D25) |
| Salience (D91) | Equity Premium (G19) |
| Downside Risks Salience (D81) | Underpricing of Risky Assets (G19) |
| Market Conditions (D49) | Asset Pricing (G19) |