Resource Allocation in the Brain and the Capital Asset Pricing Model

22 Pages Posted: 15 Jun 2020 Last revised: 6 Feb 2024

See all articles by Hammad Siddiqi

Hammad Siddiqi

University of the Sunshine Coast-School of Business and Creative Industries

Austin Murphy

Oakland University - School of Business Administration

Date Written: July 13, 2020

Abstract

Leveraging recent neuroscience findings about information processing in the brain, we show that recognizing that the brain is resource-constrained gives rise to an alpha in an otherwise standard CAPM. This alpha, which converges to zero if the brain’s resource-constraint does not bind, can generate size, betting-against-beta (BAB), value, and momentum effects as well as the observed variation in the slope of the security-market-line (SML) at specific times and horizons. Our results suggest that internal resource allocation decisions in a trader’s brain is a critical neglected dimension contributing to these phenomena, with novel predictions arising about their relative strengths and robustness.

Keywords: Asset Pricing, Predictive Processing, CAPM, Security Market Line (SML) Slope, Size Effect, Betting-Against-Beta, Value Effect, Momentum Effect

JEL Classification: G41, G12

Suggested Citation

Siddiqi, Hammad and Murphy, J. Austin, Resource Allocation in the Brain and the Capital Asset Pricing Model (July 13, 2020). Available at SSRN: https://ssrn.com/abstract=3591086 or http://dx.doi.org/10.2139/ssrn.3591086

Hammad Siddiqi (Contact Author)

University of the Sunshine Coast-School of Business and Creative Industries ( email )

Brisbane, QLD 70010
Australia
+61404900497 (Phone)

HOME PAGE: http://www.usc.edu.au/staff-repository/dr-hammad-siddiqi

J. Austin Murphy

Oakland University - School of Business Administration ( email )

Varner Hall - Room 502
Rochester, MI 48309-4401
United States
248-370-2125 (Phone)
248-370-4275 (Fax)

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