NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Michael J. Kahana

University of Pennsylvania
425 South University Avenue
Philadelphia, PA 19104

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Institutional Affiliation: University of Pennsylvania

NBER Working Papers and Publications

August 2019A Retrieved-Context Theory Of Financial Decisions
with Jessica A. Wachter: w26200
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.
 
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