Recent literature in empirical finance is surveyed in its relation to underlying behavioral principles, principles which come primarily from psychology, sociology and anthropology. The behavioral principles discussed are: prospect theory, regret and cognitive dissonance, anchoring, mental compartments, overconfidence, over- and underreaction, representativeness heuristic, the disjunction effect, gambling behavior and speculation, perceived irrelevance of history, magical thinking, quasi-magical thinking, attention anomalies, the availability heuristic, culture and social contagion, and global culture. Theories of human behavior from psychology, sociology, and anthropology have helped motivate much recent empirical research on the behavior of financial markets. In this paper I will survey both some of the most significant theories (for empirical finance) in these other social sciences and the empirical finance literature itself. Particular attention will be paid to the implications of these theories for the efficient markets hypothesis in finance. This is the hypothesis that financial prices efficiently incorporate all public

This paper examines popular advice on portfolio allocation among cash, bonds, and stocks. It documents that this advice is inconsistent with the mutual-fund separation theorem, which states that all investors should hold the same composition of risky assets. In contrast to the theorem, popular advisors recommend that aggressive investors hold a lower ratio of bonds to stocks than conservative investors. The paper explores various possible explanations of this puzzle and finds them unsatisfactory. (JEL GI l) How should an investor's attitude toward risk influence the composition of his portfolio? A simple and elegant answer to this question comes from the mutual-fund separation theorem. This theorem, a building block of the most basic Capital Asset Pricing Model (CAPM), is taught regularly to undergraduates and business students. According to the theorem, more risk-averse investors should hold more of their portfolios in the riskless asset. The composition of risky assets, however, should be the same for all investors. Popular financial advisors appear not to follow the mutual-fund separation theorem. When these advisors are asked to allocate portfolios among stocks, bonds, and cash, they recommend more complicated strategies than indicated by the theorem. Moreover, these strategies differ from the theorem in a systematic way. According to these advisors, more risk-averse investors should hold a higher ratio of bonds to stocks. This advice contradicts the conclusion that all investors should hold risky assets in the same proportion. The purpose of this paper is to document this popular advice on portfolio allocation and

He who acts in N plays to make his mean log of wealth as big as it can be made will, with odds that go to one as N soars, beat me who acts to meet my own tastes for risk. Who doubts that? What we do doubt I is that it should make us change our views on gains and losses- should taint our tastes for risk. To be clear is to be found out. Know that life is not a game with net stake of one when you beat your twin, and with net stake of nought when you do not. A win of ten is not the same as a win of two. Nor is a loss of two the same as a loss of three. How much you win by counts. How much you lose by counts. As soon as we see this clear truth, we are back to our own tastes for risk. Mean log of wealth then bores those of us with tastes for risk not real near to one odd (thin!) point on the line of all the tastes for risk-and this holds for each N, with N as big as you like. Why then do some still think they should want to make mean log of

Two behavioral concepts, loss aversion and mental accounting, have been combined to provide a theoretical explanation of the equity premium puzzle. Recent experimental evidence supports the theory, as students ’ behavior has been found to be consistent with myopic loss aversion (MLA). Yet much like certain anomalies in the realm of riskless decision-making, these behavioral tendencies may be attenuated among professionals. Using traders recruited from the CBOT, we do indeed find behavioral differences between professionals and students, but rather than discovering that the anomaly is muted, we find that traders exhibit behavior consistent with MLA to a greater extent than students.

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This paper contributes to an important recent debate around expected utility and risk aversion. Rejecting a gamble over a given range of wealth levels imposes a lower bound on risk aversion. Using this lower bound and empirical evidence on the range of the risk aversion coefficient, we calibrate the relationship between risk attitudes over small-stakes and large-stakes gambles. We find that rejecting small gambles is consistent with expected utility, contrary to a recent literature that concludes that expected utility is fundamentally unfit to explain decisions under uncertainty. Paradoxical behavior is only obtained when calibrations are made in a region of the parameter space that is not empirically relevant. JEL Classification: D00, D80, D81.