Behavioral theories of factor risk premia - Hard to measure causes of under and overreaction

Some of the most important risk premia are a result of investor market behavior and risk aversion and not just structural risk issues that require investor compensation. Given the association between risk premia and behavior, these premia at times can be fleeting or at least time varying as behavior changes. 

Time variation of returns will be associated with the degree of error expectations and under or over reaction to the market environment. There are systematic errors in expectations which arise when the macro or market environment is changing. For example, greater uncertainty may cause investors to have greater under reaction to market events based on risk aversion to loss. One-sided flow of information can create overconfidence. 

Most of the major risk premia have both risk-based and errors-based stories that are used as explanations; however, behavior stories may be harder to manage because they will be related to mistakes that can be corrected. Unfortunately, we don't know when behavioral errors will be closed.  

Nevertheless, it is useful to look at risk premia conditional on the risk sentiment environment. Macro risk factors can be measured within a framework, but measuring behavioral factors has to be focused on sentiment and excesses that create biases.