Mood, Memory, and the Evaluation of Asset Prices
Option pricing by students and professional traders: a behavioural investigation
Aaron L Bodoh-Creed
Review of Finance, 2020, vol. 24, issue 1, 227-262
Abstract:
I model the effect of associative memory on asset prices. The model includes mood-congruent memory, which predicts that the subjective goodness (or badness) of the agent’s affective state (e.g., mood) is a cue for positive (negative) information stored in long-term memory. I also include rehearsal, which implies that data recalled in the recent past are more likely to be recalled in the present. I show that mood-congruent memory causes the set of recalled information to be biased, and rehearsal generates autocorrelation in the biases across periods. The theory provides novel explanations for short-run continued overreaction to news, long-run correction of these effects, and excess volatility. I also make the novel predictions that excess volatility is highest during downturns, price biases are increasing in fundamental volatility, knowledge/experience may intensify these biases, and asset prices exhibit excess comovement.
Keywords: Behavioral asset pricing; Memory; Mood (search for similar items in EconPapers)
JEL-codes: G12 G4 G41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)
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