An anchoring adjusted currency option pricing formula is developed in which the risk of the underlying currency is used as a starting point which gets adjusted upwards to arrive at the currency call risk. Anchoring bias implies that such adjustments are insufficient. The new formula converges to...

An anchoring adjusted option pricing model is put forward in which the risk of the underlying stock is used as a starting point that gets adjusted upwards to estimate call option risk. Anchoring bias implies that such adjustments are insufficient. Black-Scholes formula is a special case with no...

People tend to think by analogies and comparisons. Such way of thinking, termed coarse thinking by Mullainathan et al [Quarterly Journal of Economics, May 2008] is intuitively very appealing. We develop a new option pricing model based on the idea that the market consists of coarse thinkers as...

We show that if sophisticated institutional managers and individual investors perceive tail-risks differently, then a new explanation for the pricing kernel puzzle emerges. We show, by example, that even a tiny difference in tail-risk perception by the two investor types can explain the pricing...

Experimental and anecdotal evidence suggests that people rely on mental accounting while valuing a call option. I show that mental accounting generates a closed-form alternative to the Black Scholes formula that does not require a complete market. The new formula differs from the Black Scholes...