Investors Pay Premiums For Bad Bets

The first formal asset pricing model—the capital asset pricing model—was built on certain assumptions, including that investors are risk-averse; will maximize the expected utility of absolute wealth; and care only about the mean and variance of return.

However, academic research has found that these assumptions don’t necessarily hold. In the real world, some investors have a “taste,” or preference, for lotterylike investments—investments that exhibit positive skewness and excess kurtosis.

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