This paper examines how mental accounting and loss aversion influence individual stock returns. The authors propose two models: one where investors are loss averse over individual stock fluctuations, and another where they are loss averse over portfolio fluctuations. They find that the second model better explains empirical phenomena, including high mean returns, excess volatility, and a large value premium in the cross-section. In the first model, investors derive utility from individual stock gains and losses. This leads to high mean returns, increased volatility, and a value premium. The model matches empirical features of aggregate asset returns, including high mean returns, excess volatility, and moderate predictability. In the second model, investors are loss averse over portfolio fluctuations. This leads to lower mean returns, reduced volatility, and a disappearance of the value premium. Portfolio accounting is less successful than individual stock accounting in explaining the data. The authors argue that mental accounting, particularly narrow framing, plays a key role in shaping investor behavior. Loss aversion and narrow framing lead investors to focus on specific gains and losses, which can affect their investment decisions. The paper shows that individual stock accounting can help explain the observed features of individual stock returns, including high mean returns, excess volatility, and a value premium. The authors also find that the results are robust to generalizations that allow for heterogeneity across investors. They conclude that mental accounting and loss aversion are important factors in explaining individual stock returns, and that individual stock accounting is a useful tool for understanding these returns.This paper examines how mental accounting and loss aversion influence individual stock returns. The authors propose two models: one where investors are loss averse over individual stock fluctuations, and another where they are loss averse over portfolio fluctuations. They find that the second model better explains empirical phenomena, including high mean returns, excess volatility, and a large value premium in the cross-section. In the first model, investors derive utility from individual stock gains and losses. This leads to high mean returns, increased volatility, and a value premium. The model matches empirical features of aggregate asset returns, including high mean returns, excess volatility, and moderate predictability. In the second model, investors are loss averse over portfolio fluctuations. This leads to lower mean returns, reduced volatility, and a disappearance of the value premium. Portfolio accounting is less successful than individual stock accounting in explaining the data. The authors argue that mental accounting, particularly narrow framing, plays a key role in shaping investor behavior. Loss aversion and narrow framing lead investors to focus on specific gains and losses, which can affect their investment decisions. The paper shows that individual stock accounting can help explain the observed features of individual stock returns, including high mean returns, excess volatility, and a value premium. The authors also find that the results are robust to generalizations that allow for heterogeneity across investors. They conclude that mental accounting and loss aversion are important factors in explaining individual stock returns, and that individual stock accounting is a useful tool for understanding these returns.