Decision-makers typically rely on informative starting points that are somewhat incorrect and then attempt to make appropriate adjustments. Such reliance on informative starting points may be an optimal response of a Bayesian decision-maker who faces finite computational resources (Lieder et al...

We model the human brain as the ultimate scarce, efficient, and rational resource that first must optimize on itself before optimizing on the resources available in the external world. We show that a new unified explanation for the equity premium puzzle, countercyclical equity premia, value...

Findings from brain sciences show that the brain must first optimize on its own internal resources before seeking to optimize on the resources available in the external world. We show that this modest change is perspective, from resource-constrained humans to resource-constrained brains,...

The general conclusion of a very large literature on the equity premium puzzle is that the simplest version of the consumption-based asset pricing model (C-CAPM) with time-additive, power utility is inconsistent with the data. I show that this conclusion is premature and the simplest version can...

In this article, I incorporate the anchoring-and-adjustment heuristic into the Black-Scholes option pricing framework, and show that this is equivalent to replacing the risk-free rate with a higher interest rate. I show that the price from such a behavioralized version of the Black-Scholes model...

Given that categorization is the core of cognition, we argue that investors do not view firms in isolation. Rather, they view them within a framework of categories that represent prior knowledge. This involves sorting a given firm into a category and using categorization-induced inferences to...

Given that categorization is the core of cognition, we argue that investors do not view firms in isolation. Rather, they view them within a framework of categories that represent prior knowledge. This involves sorting a given firm into a category and using categorization-induced inferences to...

What happens when the capital asset pricing model (CAPM) is adjusted for the anchoring and adjustment heuristic of Tversky and Kahneman (1974)? The surprising finding is that adjusting CAPM for anchoring provides a plausible unified framework for understanding almost all of the key asset pricing...

The capital asset pricing model is generally considered incapable of explaining the stock market behavior. I show that this conclusion is premature, and incorporating a pragmatic approach to approximating optimal Bayesian inference in the model resurrects CAPM. The adjusted CAPM internalizes the...