Working Paper: NBER ID: w26200
Authors: Jessica A. Wachter; Michael Jacob Kahana
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 explain three types of evidence in the financial economics literature: the role of early life experience in shaping investment choices, occurrence of financial crises, and the impact of fear on asset allocation. These applications suggest a recasting of neoclassical rational expectations in terms of beliefs as governed by principles of human memory.
Keywords: retrieved context theory; financial decisions; investment choices; financial crises; fear; asset allocation
JEL Codes: D91; E71; G11; G12; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| early life experiences (J17) | investment choices (G11) |
| investment choices (G11) | beliefs about environment (P18) |
| financial crises (G01) | retrieval of past contexts (B15) |
| retrieval of past contexts (B15) | risk aversion (D81) |
| retrieval of past contexts (B15) | altered investment behaviors (G41) |
| emotional state (D91) | asset allocation decisions (G11) |