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In stark contrast with liquid asset returns, commercial real estate idiosyncratic return means and variances do not scale with the holding period, even after accounting for all cash flow-relevant events. This puzzling phenomenon survives controlling for vintage effects, systematic risk heterogeneity, and a host of other explanations. To explain the findings, I derive an equilibrium search-based asset-pricing model that, when calibrated, provides an excellent fit to transactions data. A structural model of transaction risk seems crucial to understanding real estate price dynamics. These insights extend to other highly illiquid asset classes, such as private equity and residential real estate. [ABSTRACT FROM AUTHOR]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2005.07.013 Byline: Alan Kraus (a), Jacob S. Sagi (b) Abstract: We investigate an economy of heterogeneous agents that cannot specify all exogenous welfare-relevant events and consequently view the impact of unforeseen contingencies as utility shocks. In this setting we characterize an appropriate market equilibrium concept when securities can trade only on demand- and price-contingent events. We establish the existence of an equilibrium for a class of parametric models in which aggregating taste shocks across agents can lead to nonconsumption pricing factors. To fit the stylized facts, (i) non consumption factors must dominate the pricing kernel and contribute to the variation of the wealth-consumption ratio, (ii) markets must be incomplete and the set of claims that are traded endogenously determined, (iii) agents' preferences with respect to unforeseen contingencies must be non-expected utility, and, (iv) although non-consumption pricing factors can be conditionally uncorrelated with aggregate consumption shocks, they must be correlated with shocks to expected consumption growth. Author Affiliation: (a) University of British Columbia, Vancouver, BC, Canada V6T 1Z2 (b) Haas School of Business, University of California at Berkeley, Berkeley, CA, 94720, USA Article History: Received 2 July 2004; Revised 9 May 2005; Accepted 21 July 2005 Article Note: (footnote) [star] We are grateful to Jonathan Berk, Murray Carlson, Pierre Colin-Dufresne, Greg Duffee, Ilan Kremer, Martin Lettau, Rajnish Mehra and an anonymous referee for helpful comments and suggestions. Alan Kraus gratefully acknowledges support from SSHRC.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jmateco.2006.04.010 Byline: Alan Kraus (a), Jacob S. Sagi (b) Keywords: Inter-temporal choice; Flexibility; Non-expected utility; Decision theory; Incomplete preference relations; Utility representation; Time consistency; Unforeseen contingencies Abstract: We derive an inter-temporal theory of choice, in the spirit of Kreps and Porteus [Kreps, D.M., Porteus, E.L., 1978. Temporal resolution of uncertainty and dynamic choice theory. Econometrica 46, 185-200], where decision makers have incomplete preferences. This can be used to model indecisiveness as well as unforeseen contingencies. The key to our approach is a time consistency condition and therefore the normative connection between ex-ante and ex-post choice. The time consistency condition enables a representation that is a straight forward extension of recursive utility with the exception that it features an inter-temporal 'utility for flexibility'. Author Affiliation: (a) Faculty of Commerce, University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T 1Z2 (b) Haas School of Business, University of California at Berkeley, 545 Student Services Building, Berkeley, CA 94720-1900, United States Article History: Received 16 November 2004; Revised 29 December 2005; Accepted 1 April 2006

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jet.2005.01.009 Byline: Jacob S. Sagi Abstract: This note explores the implications of a simple and intuitive restriction on reference-dependent preferences assuming the status quo serves as the reference point. The condition imposed potentially rules out situations in which a decision maker has a choice between two prospects, selects one which subsequently becomes the new reference point, and then regrets her initial choice. It is shown that a surprising number of models in a riskless and risky setting violate this behavioral assumption, including Cumulative Prospect Theory as well as any theory exhibiting local non-satiation in which all reference-dependent indifference surfaces are smooth. It is also shown that the condition does admit a class of non-trivial reference-dependent preferences. Author Affiliation: Haas School of Business, University of California at Berkeley, 545 Student Services Building, Berkeley, CA 94720-1900, USA Article History: Received 21 August 2003; Revised 31 January 2005

Building on the Ramsey-de Finetti idea of event exchangeability, we derive a characterization of probabilistic sophistication without requiring any of the various versions of monotonicity, continuity, or comparative likelihood assumptions imposed by Savage (1954), Machina and Schmeidler (1992), and Grant (1995). Our characterization identifies a unique and finitely-additive subjective probability measure over an algebra of events.

After screening for attentiveness and comprehension, we present subjects with Ellsberg's (1961) two‐urn problem using essentially equivalent but representationally complex matrices. High‐comprehension subjects exhibit rates of ambiguity aversion typical of the standard two‐urn problem, while low‐comprehension subjects appear to randomise. In screening, we classify subjects as ‘probability‐minded’ or ‘ambiguity‐minded’, depending on whether they assign probabilities to draws from a card deck of unknown composition. Among high‐comprehension subjects, ‘mindedness’ explains twenty times more variation in ambiguity attitudes than all other demographic characteristics combined. Compared with their ‘probability‐minded’ counterparts, ‘ambiguity‐minded’ subjects are younger and more educated, analytic, and reflective about their choices. [ABSTRACT FROM AUTHOR]