This research adapts the Black-Scholes option pricing model that is widely used in practice to a world where investors only form sufficiently rational expectations (expectations that deviate from perfection without creating arbitrage opportunities). Within the no-arbitrage interval of market...

Findings from brain sciences show that the brain must first optimize on its own internal resources before seeking to optimize on the resources available in the external world. We show that this modest change is perspective, from resource-constrained humans to resource-constrained brains,...

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. This changes the classical CAPM in only one way: an alpha appears which provides a...

In the brain sciences, an influential paradigm is that the brain is a Bayesian prediction engine operating under a resource constraint. We study the implications of this view for option pricing. We show that this brain-based view leads to higher no-arbitrage prices than what the traditional...