An economy with agents having constant yet heterogeneous degrees of relative risk aversion prices assets as though there were a single decreasing relative risk aversion pricing representative agent. The pricing kernel has fat tails and option prices do not conform to the Black-Scholes formula. Implied volatility exhibits a smile. Heterogeneous beliefs about distribution parameters also implies non-lognormal pricing kernels with fatter tails and over-pricing of out-of-the-money options. Heterogeneity as the source of non-stationary pricing fits Rubinstein’s (1994) interpretation of the over-pricing as an indication of crash-o-phobia. Rubinstein’s term suggests that those who hold out-of-the-money put options have relatively high risk aversion or relatively high subjective probability assessments of low market outcomes. The essence of this explanation is heterogeneity in investor attitudes towards risks and probability beliefs.