A Retrieved-Context Theory of Financial Decisions

92 Pages Posted: 6 Nov 2019 Last revised: 19 Jan 2023

See all articles by Jessica A. Wachter

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER); Securities and Exchange Commission

Michael J. Kahana

University of Pennsylvania - Department of Psychology

Multiple version iconThere are 2 versions of this paper

Date Written: January 19, 2023

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 retrieved-context 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 explain three types of evidence in the financial economics literature: the role of early life experience in shaping investment choices, occurrence of financial crises, and the impact of fear on asset allocation. These applications 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 (January 19, 2023). 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
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Securities and Exchange Commission ( email )

100 F Street NE
Washington, DC 20549
United States

Michael J. Kahana

University of Pennsylvania - Department of Psychology ( email )

3815 Walnut Street
Philadelphia, PA 19104-6196
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,077
Abstract Views
5,496
Rank
30,038
PlumX Metrics