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,...

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...

In incomplete markets, risk judgments regarding options are necessary as options cannot be replicated by using the underlying stock and the risk-free asset. How are such risk judgments formed? Underlying stock risk is a natural starting point for call option risk as the two assets pay off in the...

In incomplete markets, risk judgments regarding options are necessary as options cannot be replicated by using the underlying stock and the risk-free asset. How are such risk judgments formed? Underlying stock risk is a natural starting point for call option risk as the two assets pay off in the...

In incomplete markets, risk judgments regarding options are necessary as options cannot be replicated by using the underlying stock and the risk-free asset. How are such risk judgments formed? Underlying stock risk is a natural starting point for call option risk as the two assets pay off in the...

Risk-averse expected utility maximization implies that the pricing kernel must be a non-increasing function of aggregate wealth. However, empirical research has found that the pricing kernel frequently displays a locally increasing portion in aggregate wealth. This is known as the pricing kernel...

A common reasoning process is to rely on an informative starting point which is somewhat incorrect and then attempt to adjust it appropriately. Evidence suggests that underlying stock volatility is such a starting point, which is scaled-up to estimate call option volatility. I adjust...

A common reasoning process is to rely on an informative starting point which is somewhat incorrect and then attempt to adjust it appropriately. Evidence suggests that underlying stock volatility is such a starting point, which is scaled-up to estimate call option volatility. I adjust...

A common reasoning process is to rely on an informative starting point which is somewhat incorrect and then attempt to adjust it appropriately. Evidence suggests that underlying stock volatility is such a starting point, which is scaled-up to estimate call option volatility. I adjust...