Academic papers 1978–2000
Shefrin's research with Thaler focused on developing a psychological-based framework for studying the economics of self-control. The most novel element of their self-control theory was a two-system structure, which they called the "planner-doer model". At the 2017 Nobel prize awards ceremony, the chair of the Nobel selection committee highlighted the planner-doer framework.
In February 1978, at a seminar at the National Bureau of Economic Research (West), located at Stanford University, Shefrin and Thaler presented the planner-doer model to psychologists Daniel Kahneman and Amos Tversky. At the time, Kahneman and Tversky's formal frameworks were one-system models. Later, in 2011, Kahneman's book, Thinking, Fast and Slow , would explain the central role of the two-system approach to behavioral decision-making. Shefrin and Thaler's planner-doer model was the first formal two-system framework in economics and finance.
During his time at Rochester, Shefrin's other research involved neoclassically-oriented projects such as generalizing the key ideas in his dissertation, the economics of student loans, a transaction cost-based theory of money (now applicable to crypto-assets), and equilibrium models for the case when agents possess differential information.
After joining the economics department at Santa Clara University, Shefrin continued his research with Thaler, extending the two-system approach for analyzing self-control issues to include temptation and mental accounting. They applied this extended approach to the study of saving behavior and called their framework "behavioral life cycle theory." The BLC subsequently provided the framework for the savings program developed by Thaler and Shlomo Benartzi called "Save More Tomorrow," which, in turn, served as the template for the "nudge" approach which was developed by Thaler and Cass Sunstein.
During the 1980s and 1990s, Shefrin and Statman applied behavioral ideas to the field of finance, calling their approach "behavioral finance," a term which had not previously been in use. Their work offered explanations for such phenomena as the dividend puzzle, investors' disposition to sell winners too early and hold losers too long, the design and marketing of financial products, behavioral beta, behavioral portfolio theory, and a behavioral approach to financial market regulation based on the concept of fairness and/or ethics.
Shefrin and Statman coined the term "disposition effect" for investors' disposition to sell winners too early and hold losers too long. They proposed that the disposition effect reflects four psychological elements, namely loss aversion (from Kahneman and Tversky's prospect theory value function), mental accounting, regret avoidance, and lack of self-control. Shefrin has long argued that the disposition effect reflects how these four elements combine. In particular, he contends that prospect theory alone does not explain the full extent of disposition behavior, especially its self-nudging features. The disposition effect has become the most studied, in the academic finance literature, of psychological behavior patterns exhibited by individual investors.
In December 1984, Shefrin and Statman organized the first session in behavioral finance at the American Finance Association. Shefrin chaired the session and Statman presented their paper on the disposition effect. At the same session, Werner De Bondt and Thaler presented their work on "the overreaction effect."
Shefrin coined the phrase "excessive rationality assumption bias" to describe neoclassical economists' reluctance to recognize the degree of imperfect rationality in human decision-making. In contrast, the behavioral approach focuses on the impact of bounded rationality on economic and financial decisions.
Shefrin uses the phrase "modern behavioral economics and finance" to refer to the behavioral field which has developed since the mid 1970s. He notes that by virtue of their work combining economics and psychology, major economists from previous generations, such as Adam Smith, Irving Fisher, John Maynard Keynes, and Herbert Simon all qualify as behavioral economists. As noted by Thaler and Shefrin (1981), Adam Smith, in his 1759 book The Theory of Moral Sentiments, employed a two-system perspective. The behavioral framework prospect theory, developed by Kahneman and Tversky, for which Kahneman received the economics Nobel in 2002, has as its foundation the work of economic Nobel laureates Harry Markowitz (1953) and Maurice Allais (1953).
During the 1980s, Shefrin worked on non-behavioral topics such as second-best theory, incomplete markets, consumer aggregation, option pricing, and women's quest for economic equality.
Books from 1999 forward
During the 1990s, Shefrin began to concentrate exclusively on behavioral issues, and to work on his first book, Beyond Greed and Fear, published by Harvard Business School Press in 1999. The main theme of this book is that psychological phenomena permeate the entire landscape of finance. Shefrin's three-volume edited collection (drawn from the behavioral literature) from 2000, titled Behavioral Finance, shares the same theme.
In the two decades between 2000 and 2020, Shefrin's work focused on the development of theoretical frameworks for applying the behavioral approach to corporate finance, asset pricing, and risk management respectively. These initiatives resulted in a series of books, Behavioral Corporate Finance (2007, 2018), A Behavioral Approach to Asset Pricing (2005, 2008), and Behavioral Risk Management (2016), each with a specific theme.
The theme of Behavioral Corporate Finance is that corporate financial decisions and their associated outcomes reflect the interaction between two elements: the degree to which corporate managers and directors are influenced by psychological phenomena, and the degree to which financial markets are efficient.
The theme of A Behavioral Approach to Asset Pricing is that psychological phenomena distort the shape of the pricing kernel, which underlies the pricing of all assets. Typically, a behavioral pricing kernel features an oscillating pattern, whereas a neoclassical pricing kernel features a monotone declining pattern.
The theme of Behavioral Risk Management is that psychological phenomena underlie every major risk management failure that has occurred since 2000. This is especially true of the global financial crisis, an event to which the book devotes several chapters.
Along with armed conflict, global warming is arguably the biggest long-term challenge facing the human race. Since 2007, global warming has been a persistent theme in Shefrin's work. The theme of his book, The Behavioral Economics and Politics of Global Warming, published in 2023, is what he calls the "big behavioral question:" This question asks why, for decades, global decisions about addressing global warming have ignored the advice offered by mainstream economists. Shefrin's suggested answer features many psychological phenomena, with the most important being "present bias."
Each of Shefrin's four books just described constitute firsts of a kind. Beyond Greed and Fear was the first book to provide a comprehensive treatment of behavioral finance, focused on the judgments and decisions of financial practitioners. Behavioral Corporate Finance was the first book applying the behavioral perspective to analyzing the full spectrum of corporate financial decisions. In this regard, the term "behavioral corporate finance" was not in use before Shefrin's 2001 article titled "Behavioral Corporate Finance." A Behavioral Approach to Asset Pricing was the first book to develop behavioral pricing kernel theory. The Behavioral Economics and Politics of Global Warming was the first comprehensive treatment of how behavioral ideas can explain the failure to address climate change appropriately.
Academic papers from 2001 forward
In a series of papers, some co-authored, Shefrin expanded on the themes developed in his books. His work in behavioral asset pricing focuses on:
- analysts' reluctance to use the standard techniques of textbook finance when making valuation judgments
- the extension of behavioral pricing kernel theory to cover ESG investing
- the use of survey data to identify the factor structure underlying investors' empirical expectations about risk and return
- the role of sentiment in the pricing of bitcoin
His work in behavioral corporate finance focuses on:
- the role of focal points in corporate decisions about investment and financing
- corporate culture issues stemming from Herbert Simon's seminal work Administrative Behavior, for which Simon received the economics Nobel in 1978
Shefrin's work in behavioral risk management analyzes:
- the framework developed by the economist Hyman Minsky
- public policy associated with the Covid-19 pandemic
- financial literacy
- AI
In 2015, Shefrin began to apply the term "unfinished business" to work begun earlier that was still incomplete. In the mid-2020s, he focused on two unfinished business projects. The first is a chapter contribution to the second edition of The Handbook of Utility Theory, updating his contribution from thirty years earlier. The updated chapter has as its theme the contention that the two-system approach is superior to the one-system approach for explaining the real-world behavior of economic agents, both at the microeconomic level and the macroeconomic level. In addition, the chapter notes that the planner and doer, as concepts, are identified with specific neurological regions, making the planner-doer framework the first formal model in the field of neuroeconomics.
A second piece of unfinished business is his paper on women's quest for economic equality, which he began in the 1980s with the late Stanford economist Victor Fuchs. In 2025, he updated this paper, which uses game theory to study the theme of child care subsidies helping women. The updated paper drew on 35 years of empirical work that had since emerged, and applied the theory to analyze policy decisions internationally, and especially in the U.S.
