Investor Psychology and Asset Pricing


  • David Hirshleifer

    Search for more papers by this author
    • Hirshleifer is from the Fisher College of Business, The Ohio State University. This survey was written for presentation at the American Finance Association Annual Meetings in New Orleans, January, 2001. I especially thank the editor, George Constantinides, for valuable comments and suggestions. I also thank Franklin Allen, the discussant, Nicholas Barberis, Robert Bloomfield, Michael Brennan, Markus Brunnermeier, Joshua Coval, Kent Daniel, Ming Dong, Jack Hirshleifer, Harrison Hong, Soeren Hvidkjaer, Ravi Jagannathan, Narasimhan Jegadeesh, Andrew Karolyi, Charles Lee, Seongyeon Lim, Deborah Lucas, Rajnish Mehra, Norbert Schwarz, Jayanta Sen, Tyler Shumway, René Stulz, Avanidhar Subrahmanyam, Siew Hong Teoh, Sheridan Titman, Yue Wang, Ivo Welch, and participants of the Dice Finance Seminar at Ohio State University for very helpful discussions and comments.


The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.