Optimal Resource Allocation in the Brain and the Capital Asset Pricing Model

Siddiqi Hammad and Murphy Austin

MPRA Paper from University Library of Munich, Germany

Abstract: Using recent findings from brain sciences, we relax the implicit CAPM assumption of sufficient brain resources, and model human brain as solving two optimization problems instead of one, which are: 1) Optimal resource allocation in the brain. 2) Mean-variance optimization. A security market line with varying slopes (flat, upwards, and downwards) arises depending on the resource allocation decisions in the brain. Size, value, and momentum effects also emerge in this enriched framework. This suggests that the classical CAPM is not misspecified. Rather, what appears as misspecification may be the result of ignoring the optimal resource allocation problem in the brain.

Keywords: CAPM; SML Slope; Resource Allocation; Size; Value; Momentum; High-Alpha-of-Low-Beta (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2020-08-01
New Economics Papers: this item is included in nep-fmk and nep-ore
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