Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk*

Sharpe, William F.

doi:10.1111/j.1540-6261.1964.tb02865.x

Cited by 7,894 publications

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“…In fact, a typical measure of risk is the second moment of the distribution of outcomes, that is, the variance of outcomes around the option's expected value. The higher the outcome variance of risky options (with otherwise equal expected values), that is, the riskier it is, the less likely people are to choose the options, and the lower their willingness to pay for them (Sharpe, 1964). This ''payoff-variability effect'' is also observed when people experience variance while choosing repeatedly from a set of options (Busemeyer & Townsend, 1993;Erev & Barron, 2005;Myers & Sadler, 1960).…”

Section: Does the Experience Of Variability Results In More Search?mentioning

confidence: 99%

How choice ecology influences search in decisions from experience

2012

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a b s t r a c tResearch into human decision-making has often sidestepped the question of search despite its importance across a wide range of domains such as search for food, mates, allies, visual targets or information. Recently, research on decisions from experience has made progress in finding out how individual characteristics shape search for information. Surprisingly little is known, however, about how the properties of the choice ecology shape people's search. To fill this void, we analyzed how two key ecological properties influence search effort: domain of choice (gains vs. losses) and experienced variance (variance vs. no variance). Many people search longer when facing the prospect of losses relative to gains. Moreover, most people search more in options in which they experience variance relative to options they experience as invariant. We conclude that two factors that have been identified as important determinants of choice also influence search of information.Ó 2012 Elsevier B.V. All rights reserved. IntroductionFor Herbert Simon, one of the most influential economists and cognitive scientists of the second half of the 20th century, search was perhaps the key cognitive process of human life. For instance, in his work with Allen Newell, he conceptualized problem-solving as search for a path through a problem space with the goal of finding a route linking the problem's initial state to the goal state via intermediate steps and subgoals (Newell & Simon, 1972). Search also figures prominently in his notion of ''satisficing'' (Simon, 1956(Simon, , 1990. Satisficing is a method one can recruit when choosing from a set of alternatives (e.g., job candidates, mates) that one encounters sequentially and when little is known about the possible alternatives further down the road. Satisficing means that the decision maker sets an aspiration level and terminates sequential search for alternatives as soon as one is found whose value exceeds the aspiration level. Finally, in a grand metaphor of human life, Simon (1996) depicted our existence as search through a ''life's maze'' (p. 166), representing a multiplicity of needs and wants, and the need to ''survive without drawing upon superhuman powers of intelligence and computation'' (p. 175).Notwithstanding the importance of search as a behavioral and cognitive process across a wide range of domains-foraging for food, visual search for targets, memory search in recall and recognition tasks, the search for information on the web, and the search for mates in social environments (Todd, Hills, & Robbins, 2012)-research on behavioral decision-making (e.g., research on inductive and logical reasoning) and cognition (e.g., research on moral reasoning) has often sidestepped questions of search by using tasks in which summary information is conveniently displayed before the respondents. Past research on risky choice exemplifies this methodological proclivity. Decision researchers, using choice between monetary 0010-0277/$ -see front matter Ó

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Section: Does the Experience Of Variability Results In More Search?mentioning

confidence: 99%

How choice ecology influences search in decisions from experience

2012

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“…For example, early studies focussed on international applications of the Capital Asset Pricing Model (CAPM), originally developed in a domestic context by Sharpe (1964) and Lintner (1965). The model was internationalized by allowing investors to di er across countries, according to their preferred currency or consumption basket (e.g.…”

Section: Introductionmentioning

confidence: 99%

Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing

Ferson

Harvey

1996

SSRN Journal

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This paper provides a global asset pricing perspective on the debate over the relation between predetermined attributes of common stocks, such as ratios of price-to-bookvalue, cash-¯ow, earnings, and other variables to the future returns. Some argue that such variables may be used to ®nd securities that are systematically undervalued by the market, while others argue that the measures are proxies for exposure to underlying economic risk factors. It is not possible to distinguish between these views without explicitly modelling the relation between such attributes and risk factors. We present an empirical framework for attacking the problem at a global level, assuming integrated markets. Our perspective pulls together the traditional academic and practitioner viewpoints on lagged attributes. We present new evidence on the relative importance of risk and mispricing e ects, using monthly data for 21 national equity markets. We ®nd that the cross-sectional explanatory power of the lagged attributes is related to both risk and mispricing in the two-factor model, but the risk e ects explain more of the variance than mispricing. Ó 1998 Elsevier Science B.V. All rights reserved. 0378-4266/97/$17.00 Ó 1997 Elsevier Science B.V. All rights reserved. PII S 0 3 7 8 -4 2 6 6 ( 9 7 ) 0 0 0 4 4 -7

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“…In spite of these facts modern event study literature refers to Ball and Brown and Fama-FisherJensen-Roll contributions because of two reasons. In these papers for the first time the market model by Sharpe [42] was applied and both papers used data from the newly established Center for Research in Security Prices (CRSP) at the University of Chicago. This data source became the standard in capital markets research.…”

Section: Introductionmentioning

confidence: 99%