Behavioralizing the Black-Scholes Model

21 Pages Posted: 26 Apr 2018

See all articles by Hammad Siddiqi

Hammad Siddiqi

University of the Sunshine Coast-School of Business

Date Written: March 1, 2015


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 generally lies within the no-arbitrage bounds when there are transaction costs. The behavioralized version explains several phenomena (implied volatility skew, countercyclical skew, skew steepening at shorter maturities, inferior zero-beta straddle return, and superior covered-call returns) which are anomalies in the traditional Black-Scholes framework. Six testable predictions of the behavioralized model are also put forward.

Keywords: Black-Scholes, Anchoring-and-Adjustment, Implied Volatility, Zero-Beta Straddle, Covered-Call, Leverage-Adjusted Return

JEL Classification: G13, G12

Suggested Citation

Siddiqi, Hammad, Behavioralizing the Black-Scholes Model (March 1, 2015). Available at SSRN: or

Hammad Siddiqi (Contact Author)

University of the Sunshine Coast-School of Business ( email )

Brisbane, QLD 70010
+61404900497 (Phone)


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