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

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  • Hammad, Siddiqi
  • Austin, Murphy

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.

Suggested Citation

  • Hammad, Siddiqi & Austin, Murphy, 2020. "Optimal Resource Allocation in the Brain and the Capital Asset Pricing Model," MPRA Paper 102705, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:102705
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    File URL: https://mpra.ub.uni-muenchen.de/102705/1/MPRA_paper_102705.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    CAPM; SML Slope; Resource Allocation; Size; Value; Momentum; High-Alpha-of-Low-Beta;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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