The chapter discusses the evolving paradigm of asset pricing, which is shifting from a purely rational approach to one that incorporates investor psychology. It highlights the importance of both risk and misvaluation in determining security returns. The author reviews the evidence and models supporting the role of investor psychology in asset pricing, emphasizing the need to understand decision biases and the dynamic behavior of mispricing. The chapter also explores the challenges and limitations of traditional rationality assumptions, suggesting that a broader psychological paradigm will eventually replace the purely rational approach. It discusses various psychological biases, such as heuristic simplification, self-deception, and emotional loss of control, and their implications for asset pricing. The author argues that these biases are rooted in evolutionary adaptations and can explain many observed market phenomena, including the persistence of mispricing and the impact of investor emotions on decision-making.The chapter discusses the evolving paradigm of asset pricing, which is shifting from a purely rational approach to one that incorporates investor psychology. It highlights the importance of both risk and misvaluation in determining security returns. The author reviews the evidence and models supporting the role of investor psychology in asset pricing, emphasizing the need to understand decision biases and the dynamic behavior of mispricing. The chapter also explores the challenges and limitations of traditional rationality assumptions, suggesting that a broader psychological paradigm will eventually replace the purely rational approach. It discusses various psychological biases, such as heuristic simplification, self-deception, and emotional loss of control, and their implications for asset pricing. The author argues that these biases are rooted in evolutionary adaptations and can explain many observed market phenomena, including the persistence of mispricing and the impact of investor emotions on decision-making.