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The Resource-Constrained Brain: A New Perspective on the Equity Premium Puzzle

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  • Hammad Siddiqi
  • Austin Murphy

Abstract

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 in perspective, from resource-constrained humans to resource-constrained brains, provides a new perspective on how assets are priced in financial markets. We show that the brain-centric perspective potentially lowers the risk aversion needed to reconcile consumption data with asset prices and can contribute to countercyclical equity premia. We show that the brain-centric perspective can be easily integrated with several existing approaches on the equity premium puzzle.

Suggested Citation

  • Hammad Siddiqi & Austin Murphy, 2023. "The Resource-Constrained Brain: A New Perspective on the Equity Premium Puzzle," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 24(3), pages 315-332, July.
    • Handle: RePEc:taf:hbhfxx:v:24:y:2023:i:3:p:315-332
    DOI: 10.1080/15427560.2021.1975716
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    Cited by:

    1. Siddiqi, Hammad, 2022. "Asset Pricing in the Resource-Constrained Brain," MPRA Paper 120526, University Library of Munich, Germany, revised 05 Feb 2024.
    2. Hammad Siddiqi, 2024. "Strict certainty preference in the predictive brain: a new perspective on financial innovations and their role in the real economy," Annals of Finance, Springer, vol. 20(2), pages 277-287, June.

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