Resource Allocation in the Brain and the Capital Asset Pricing Model

33 Pages Posted: 15 Jun 2020 Last revised: 22 Nov 2021

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

Using recent findings from brain sciences, we model the human brain as solving two optimization problems instead of one, which are (i) optimal resource allocation in the brain and (ii) mean-variance optimization. We show that this changes the CAPM in only one way: an alpha appears which potentially contributes to momentum, value, high-alpha-of-low-beta, and size effects. Resource allocation in the brain suggests that the momentum effect is most robust, followed by value, with size effect being the least robust. SML slope varies with resource allocation decisions in the brain suggesting a new approach to the overnight effect and related puzzles..

Keywords: CAPM, Value Effect, Size Effect, Momentum Effect, Betting-Against-Beta, Schema, Neuroscience

JEL Classification: G12, G10

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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