Abstract

Risk theory has dominated the asset pricing literature since the 1960s. We chronicle empirical failures of conventional risk theory to explain the return on equities. Aversion to risk presumes that investors are averse to both upside and downside risk.  The former is contrary to human nature, even if it makes the mathematics of finance relatively simple.  We suggest a new perspective that replaces aversion to variance with fear of missing out (FOMO, captured by a preference for skew) and fear of loss (FOL, captured by an aversion to semivariance). In so doing, we propose replacing risk theory with fear theory, in the hope of effecting a long-overdue marriage of behavioral and neoclassical finance.