An anchoring adjusted currency option pricing formula is developed in which the risk of the underlying currency is used as a starting point which gets adjusted upwards to arrive at the currency call risk. Anchoring bias implies that such adjustments are insufficient. The new formula converges to...

Market professionals with decades of experience typically argue that a call option is a surrogate for the underlying asset, indicating that they perceive the risk of a call option as similar to the risk of the underlying asset. Experimental evidence also points to the same conclusion. Such...

An analogy based call option pricing model is put forward. The model provides a new explanation for the implied volatility skew puzzle. The analogy model is consistent with empirical findings about returns from well studied option strategies such as covered call writing and zero-beta straddles....

People tend to think by analogies and comparisons. Such way of thinking, termed coarse thinking by Mullainathan et al [Quarterly Journal of Economics, May 2008] is intuitively very appealing. We develop a new option pricing model based on the idea that the market consists of coarse thinkers as...

The two most intriguing anomalies in currency markets are: 1) the implied volatility smile in currency options, and 2) the forward discount bias in currency exchange rates. I show that if currency options are valued in analogy with the underlying currency and beliefs are heterogeneous, then the...

The principle of no arbitrage says that identical assets should offer the same returns. However, experimental and anecdotal evidence suggests that people often rely on analogy making while valuing assets. The principle of analogy making says that similar assets should offer the same returns. I...

We put forward a new option pricing formula based on the notion that people tend to think by analogies and comparisons. The new formula differs from the Black Scholes formula due to the appearance of a parameter in the formula that captures the risk premium on the underlying. The new formula,...

Typically, three types of implied volatility smiles are seen in commodity options: the reverse skew, the smile, and the forward skew. I put forward an economic explanation for all three types of implied volatility smiles based on the idea that a commodity call option is valued in analogy with...

People tend to think by analogies. We investigate whether thinking-by-analogy matters for investors’ willingness to pay for a risky asset in a laboratory experiment. We find that thinking-by-analogy has a strong influence when the assets in question have similar (but not identical) payoffs....

An anchoring adjusted option pricing model is put forward in which the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. Anchoring bias implies that such adjustments are insufficient. Black-Scholes formula is a special case with no...