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Thursday, December 12, 2019
4:00 PM - 5:00 PM
Baxter B125

Finance Seminar

A Retrieved-Context Theory of Financial Decisions
Jessica A. Wachter, Richard B. Worley Professor of Financial Management, Professor of Finance, Wharton School of Business, University of Pennsylvania,

Abstract: 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.

Finance Seminars at Caltech are funded through the generous support of The Ronald and Maxine Linde Institute of Economic and Management Sciences (lindeinstitute.caltech.edu).

For more information, please contact Sabrina Hameister by phone at 626-395-4228 or by email at sabrina@hss.caltech.edu.