CAPM vs Behavioral Finance
Risk and return: Does behavioral finance provide better explanations than the CAPM?
- 28 pages
- 1 hour of reading
The thesis explores the cognitive biases influencing financial decision-making, referencing Adam Smith's insights on overestimating gains and underestimating losses. It highlights findings from behavioral economist Daniel Kahneman regarding biased choices under uncertainty. Empirical tests of the Capital Asset Pricing Model (CAPM) on stock data reveal that the market premium alone does not fully account for stock returns. The work critiques existing literature, including Stambough's findings on the relationship between beta and average returns, suggesting further complexities in financial models.
