Experimental evidence and opinions of market professionals suggest that mental accounting influences option prices. I explore the implications of mental accounting of a call option with its underlying for risk management. If mental accounting influences prices and the Black Scholes approach is...

Mullainathan et al. (2008) present a model of coarse thinking or analogy-based thinking. The essential idea behind coarse thinking is that people put situations into categories, and the values assigned to attributes in a given situation are affected by the values of corresponding attributes in...

Based on experimental evidence, I adjust the standard currency option pricing models for the anchoring heuristic of Tversky and Kahneman (1974). Anchoring provides an explanation for the market practice of using risk-reversals as sentiment proxy. While generating currency smiles even with...

Using leverage adjusted index option data, a novel prediction of the anchoring adjusted option pricing model is tested. The anchoring model is based on the idea that the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. The...

What happens when the anchoring and adjustment heuristic of Tversky and Kahneman (1974) is incorporated in currency option models? Surprisingly, it generates the peculiar features of currency smiles within the Black-Scholes framework, while adding power to stochastic volatility and jump...

What happens when the anchoring and adjustment heuristic of Tversky and Kahneman (1974) is incorporated in currency option models? Surprisingly, it generates the peculiar features of currency smiles within the Black-Scholes framework, while adding power to stochastic volatility and jump...