A Retrieved-Context Theory of Financial Decisions

58 Pages Posted: 26 Feb 2019 Last revised: 9 Aug 2019

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

Date Written: August 7, 2019

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: over-persistence of beliefs, providence of financial crises, price momentum, 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, Momentum, 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 (August 7, 2019). 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

Michael J. Kahana

University of Pennsylvania - Department of Psychology ( email )

3815 Walnut Street
Philadelphia, PA 19104-6196
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
269
Abstract Views
1,091
rank
113,029
PlumX Metrics