A Retrieved-Context Theory of Financial Decisions

87 Pages Posted: 6 Nov 2019 Last revised: 25 Sep 2020

See all articles by Jessica A. Wachter

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Michael J. Kahana

University of Pennsylvania - Department of Psychology

Multiple version iconThere are 2 versions of this paper

Date Written: September 24, 2020

Abstract

Studies of human memory indicate that features of an event
evoke memories of prior associated contextual states, which in turn
become associated with the current event's features. This mechanism
allows the remote past to influence the present, even as agents
gradually update their beliefs about their environment. We apply a
version of retrieved context theory, drawn from the literature on
human memory, to four problems in
asset pricing and portfolio choice: under and over-reaction, the role
of early life experience in shaping economic decisions, providence of financial crises, and the
impact of fear on asset allocation. These examples suggest a
recasting of neoclassical rational expectations in terms of beliefs as
governed by principles of human memory.

Keywords: Memory, Context, Under-reaction, Financial Disasters

JEL Classification: D03, D81, G02, G11, G12

Suggested Citation

Wachter, Jessica A. and Kahana, Michael J., A Retrieved-Context Theory of Financial Decisions (September 24, 2020). 10th Miami Behavioral Finance Conference, Available at SSRN: https://ssrn.com/abstract=3333248 or http://dx.doi.org/10.2139/ssrn.3333248

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER)

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Michael J. Kahana

University of Pennsylvania - Department of Psychology ( email )

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Philadelphia, PA 19104-6196
United States

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