I find asset pricing theory very vague and full of assumptions, especially the consumption-based modern theory. In its essence, the theory states that asset prices depend on the covariance between consumption and the asset's payoff - if an asset pays well in bad states of consumption, it warrants a higher price and vice versa. The logic behind this is ok, but what bugs me is that I don't see people behaving like this in reality, and I don't see any reason they should.
Most people who participate actively in the stock market, for example, are either traders working for an institution, or investors with a decent amount of extra capital (people rarely invest in the stock market if the amount of money invested would significantly affect their consumption). Now, I really don't think traders' or fund managers' consumption levels in bad economic states is much affected by their work performance. At least it's hard to see the link. Secondly, most private investors investing in the stock market have financial buffer - they are already backed up for recessions, and just want to see their extra money grow. They don't care that much if their investment pays off well in recessions particularly. If the investment shows up a profit, they are equally happy regardless of what the economic state is because that profit will not be used to improve their level of consumption in that particular time since they are already covered.
Am I missing something here? Do you agree with me? I know that behavioral finance probably answers many of my questions, but nevertheless, consumption-based pricing theory is taught in finance programs and serves as a fundamental theory of everything. Again, I think that the theory is otherwise sound but the assumption that people who make investment decisions are driven by their future consumption level in different economic states is vague.