Behavioral studies in economics and finance,such as Kahneman and Tversky (1974, 1979,2000),Tversky and Kahneman (1986),Barberis,Shleifer,and Vishny (1998), Thaler(1999),suggest that economic agents are less than fully rational.They are often psychologically biased.Their psychological biases,together with "limits of arbitrage", lead to asset price'deviations from fundamental values and may generate a large number of anomalies that cannot be easily explained in the rational expectations paradigm. While it is important to identify plausible causes for asset pricing anomalies,most investors would be more interested in knowing how to take advantage of other people's behavioral biases to make money.In this paper,we build an equilibrium model to demonstrate how "smart money"can profit from other investors'irrational behaviors. The model has three classes of investors:a manipulator,behavior-driven investors,and arbitrageurs.Behavior-driven investors are not fully rational,whose behavioral biases used in the model are momentum trading and unwillingness to sell losers.These two psychological biases are supported by many theoretical and empirical studies,including Hong and Stein(1999),Odean (1998),Shefrin and Statman(1985),among others. Arbitrageurs play a critical role in preventing large price jumps and market crash,but because of the limits of arbitrage,they cannot fully eliminate asset price's deviation from fundamental value. The manipulator is a large investor who is a price setter rather than a price taker.As a deep-pocket investor,he lures momentum investors into the market by pumping up the stock price and then dumps the stock to make a profit by taking advantage of the disposition effect and the limits of arbitrage. Barberis and Thaler(2003)and Hirshleifer(2001)provide detailed surveys of the behavior literature. 22 Behavioral studies in economics and finance, such as Kahneman and Tversky (1974, 1979, 2000), Tversky and Kahneman (1986), Barberis, Shleifer, and Vishny (1998) , Thaler (1999), suggest that economic agents are less than fully rational1 . They are often psychologically biased. Their psychological biases, together with “limits of arbitrage”, lead to asset price’ deviations from fundamental values and may generate a large number of anomalies that cannot be easily explained in the rational expectations paradigm. While it is important to identify plausible causes for asset pricing anomalies, most investors would be more interested in knowing how to take advantage of other people’s behavioral biases to make money. In this paper, we build an equilibrium model to demonstrate how “smart money” can profit from other investors’ irrational behaviors. The model has three classes of investors: a manipulator, behavior-driven investors, and arbitrageurs. Behavior-driven investors are not fully rational, whose behavioral biases used in the model are momentum trading and unwillingness to sell losers. These two psychological biases are supported by many theoretical and empirical studies, including Hong and Stein (1999), Odean (1998), Shefrin and Statman (1985), among others. Arbitrageurs play a critical role in preventing large price jumps and market crash, but because of the limits of arbitrage, they cannot fully eliminate asset price’s deviation from fundamental value. The manipulator is a large investor who is a price setter rather than a price taker. As a deep-pocket investor, he lures momentum investors into the market by pumping up the stock price and then dumps the stock to make a profit by taking advantage of the disposition effect and the limits of arbitrage. 1 Barberis and Thaler (2003) and Hirshleifer (2001) provide detailed surveys of the behavior literature