Global Finance Journal xxx (xxxx) xxx–xxx

Contents lists available at ScienceDirect

Global Finance Journal

journal homepage: www.elsevier.com/locate/gfj

Neurofinance versus the efficient markets hypothesis

Kavous Ardalan
School of Management, Marist College, Poughkeepsie, NY 12601-1387, USA

AR TI CLE I NF O AB S T R A CT

JEL classifications: This paper develops the implication of neurofinance with respect to the efficient markets hy-
G40 pothesis. Neurofinance informs us that thinking imposes strain on the mind, in the sense that
G41 thinking is a comparatively laborious, biologically costly, and neurologically expensive cognitive
Keywords: process. The paper shows that people balance the costs and benefits of thinking and demonstrates
Neurofinance mathematically that such balancing makes financial markets inefficient.
Behavioral finance
Costly thinking
Efficient markets hypothesis

Neurofinance is an emerging transdisciplinary field that uses neuroscientific measurement techniques to identify the neural
substrates associated with financial decisions. Neurofinance intends to go beyond behavioral finance,1 as it promises to identify the
physiological causes underlying deviations from neoclassical utility-maximizing behavior.
Traditional neoclassical finance starts by assuming utility maximization to generate models that try to predict how people make
financial choices. Behavioral finance examines conditions under which human behavior persistently violates the utilitarian as-
sumption of the neoclassical finance models, and considers alternative explanations. Behavioral finance focuses on the application of
behavioral economics to conditions of risk. That is, it investigates how people act and interact in the process of making financial
decisions, and interprets these actions according to established psychological concepts and theories. In contrast, neurofinance intends
to open the black box of the human brain to understand the physiological processes (including hormonal activities) that take place
when people make financial decisions.
This paper emphasizes the implication of neurofinance with respect to the efficient markets hypothesis. To this end, Section 1
discusses neurofinance, which informs us that thinking imposes strain on the mind, in the sense that thinking is a comparatively
laborious, biologically costly, and neurologically expensive cognitive process. Section 2 demonstrates that people balance the costs
and benefits of thinking and that this balancing act makes financial markets inefficient. Finally, Section 3 concludes the paper. The
purpose of this paper is not to create a new piece of the puzzle, but to put the existing pieces together to make sense of it.

1. Neurofinance: thinking is straining

Neuroeconomics notes that an entirely new set of constructs underlies economic decision-making. Although neoclassical econ-
omists may privately acknowledge that flesh-and-blood human beings often choose without much deliberation, their written

E-mail address: Kavous.Ardalan@Marist.Edu.

1
For this literature, see Aggarwal (2014), Akerlof and Shiller (2009), Altman (2006), Aumann (1997), Brzezick and Wisniewski (2014), Camerer (2006, 2008),
Camerer and Loewenstein (2004), Conlisk (1996a, 1996b), De Bondt, Muradoglu, Shefrin, and Staikouras (2008), Evstigneev, Schenk-Hoppe, and Ziemba (2013),
Gabaix and Laibson (2000), Gilovich and Griffin (2002), Hirshleifer (2001), Hogarth and Reder (1987), Jones (1999), Kahneman (2003a, 2003b, 2011), Kahneman,
Slovic, and Tversky (1982), Kahneman and Tversky (1979), Rabin (1998, 2002), Shefrin (2001, 2002), Shiller (2000, 2003), Shleifer (2000), Simon (1955, 1956, 1957,
1959, 1967, 1976, 1978, 1982, 1987, 1992, 2000), Smith (2005), Statman (1999), Szyszka (2013), Thaler (1993, 2000), Tseng (2006), Tversky and Kahneman (1981,
1992), and Zaleskiewics (2006).

http://dx.doi.org/10.1016/j.gfj.2017.10.005
Received 12 July 2017; Received in revised form 24 October 2017; Accepted 24 October 2017
1044-0283/ © 2017 Elsevier Inc. All rights reserved.

Please cite this article as: Ardalan, K., Global Finance Journal (2017), http://dx.doi.org/10.1016/j.gfj.2017.10.005
K. Ardalan Global Finance Journal xxx (xxxx) xxx–xxx

economic models invariably represent decisions that are in a state of “deliberative equilibrium”: one where further deliberation,
computation, reflection, etc. would not change the decision-maker's choice. It is as if the decision-maker had unlimited time and
computing ability. Neuroscience does not deny that deliberation is part of human decision-making, but it points out that the neo-
classical approach disregards the crucial role of automatic processing.2
Automatic processes constitute much of what the brain implements. These take place much faster than conscious deliberations,
and occur with little (or no) awareness or feeling of effort. Since people have little or no introspective access to these processes and
little or no volitional control over them, and since these processes have evolved to solve problems of evolutionary importance rather
than to respect logical dicta, the behavior that these processes generate need not follow normative axioms of inference and choice.
Human behavior is partly the outcome of a fluid interaction between controlled and automatic processes. However, neoclassical
models routinely and falsely interpret many behaviors that emerge from that interplay as being the product of cognitive deliberation
alone. Such introspective accounts of the basis for choice should be taken with a grain of salt. Since for efficiency automatic processes
must keep behavior “off-line” and below consciousness, human beings have far more introspective access to controlled than to
automatic processes. Indeed, since we see only the top of the automatic iceberg, we tend to exaggerate the importance of control.
Automatic and controlled processes go by various labels: rule-based and associative processes; rational and experiential systems;
reflective and reflexive processes; deliberative and implementive systems; assessment and locomotion; and type I and type II pro-
cesses.
Controlled processes are serial (they follow step-by-step logic or computations), are used deliberately by the human being when
he or she encounters a challenge or surprise, and are often associated with a subjective feeling of effort. Human beings can often
provide a good introspective account of controlled processes. Standard tools of neoclassical economics, such as decision trees and
dynamic programming, are stylized representations of controlled processes.
Automatic processes have the opposite characteristics: they operate in parallel, are not accessible to consciousness, and are
relatively effortless. Parallelism facilitates rapid response and allows for massive multitasking that empowers the brain to perform
certain types of tasks, such as visual identification, and provides redundancy that decreases the brain's vulnerability to injury.
Since people are not able to consciously scrutinize automatic processes, they often have surprisingly little introspective insight
into the way they made their automatic choices or judgments. Afterwards, the controlled system may reflect on the automatic choice
or judgment and attempt to substantiate it logically, but it often does so spuriously.
Automatic and controlled processes occur in different regions of the brain. Automatic processes mostly occur in the back (oc-
cipital), top (parietal), and side (temporal) parts of the brain. The amygdala, which is located below the cortex, handles many
important automatic affective responses, especially fear. Controlled processes mainly occur in the front (orbital and prefrontal) parts
of the brain. The prefrontal cortex (pFC) is sometimes referred to as the “executive” region, because it retrieves inputs from almost all
other regions of the brain, integrates them to form near- and long-term goals, and plans actions based on these goals. The prefrontal
area is the region of the brain that has grown the most in the course of human evolution and, therefore, most sharply differentiates
human beings from their closest primate relatives.
Automatic processes are the default mode of the operation of the brain. They operate all the time—even when human beings
dream—and constitute most of the electrochemical activities in the brain. Controlled processes occur at special moments when they
“interrupt” automatic processes. This happens when a human being encounters unexpected events, experiences strong visceral states,
or faces some kind of explicit challenge in the form of a novel decision or problem.
Deliberation is hard work. It requires competing for mental resources and attention with all the other work that needs to be done
at the same moment. Given the severe limitations of controlled processes, the brain constantly automates the processing of delib-
erative tasks, so that it can execute such tasks through automatic rather than controlled processes. When the brain confronts a new
problem, it initially draws heavily on diverse regions of itself, including the prefrontal cortex (where controlled processes are con-
centrated). But, over time, the response to that problem becomes more streamlined and concentrated in brain regions that are
specialized in processing the relevant tasks.

2. Costly thinking and the efficient markets hypothesis

This section discusses the implication of costly thinking with respect to the efficient markets hypothesis. Subsection 2.1 presents
the idea intuitively, and Subsection 2.2 presents it formally.

2.1. Intuitive presentation

Neuroscience informs us that thinking imposes strain on the mind, in the sense that thinking is comparatively laborious and
neurologically expensive. Cognition requires concentration. When thinking is costly, decision-making is costly. Individuals compare

2
For this literature, see Bargh (1984, 1997), Bargh and Chartrand (1999), Bargh, Chaiken, Raymond, and Hymes (1996), Camerer (2007), Camerer, Loewenstein,
and Prelec (2004, 2005), Clore (1992), Cohen (2005), Damasio (2008), Edwards (2017), Elster (1998), Fellows (2004), Goetz and James (2008), Harrison (2008),
Kenning and Plassmann (2005), Knutson and Bossaerts (2007), Kuhnen and Knutson (2005, 2011), Kuorikoski and Ylikoski (2010), Loewenstein (1996), Loewenstein
and Lerner (2003), Logan (1989), Lohrenz and Montague (2008), Payzan-LeNestour (2017), Peterson (2008, 2010, 2017), Romer (2000), Sahi (2012), Sanfey,
Loewenstein, McClure, and Cohen (2006), Sapra and Zak (2017), Schelling (1978), Schneider and Shiffrin (1977), Shiffrin and Schneider (1977), Shiv and Fedorikhin
(1999), Slovic, Finucane, Peters, and MacGregor (2002), Wills (2017), Winkielman and Berridge (2004), Zajonc (1984), and Zak (2004). This section is based on
Camerer et al. (2005).

2
K. Ardalan Global Finance Journal xxx (xxxx) xxx–xxx

and contrast the costs and benefits of thinking about a particular problem in order to make a decision. When thinking is costly, most,
if not all, individuals tend to apply less thinking than when thinking is not costly. This means that individuals do not apply their
thinking capacity to the fullest extent, and therefore their decisions deviate from the decisions that would be based on the full
(costless) optimization problems which are assumed by the efficient markets hypothesis.3
Financial economists have long had faith that the price mechanism is the most effective way to aggregate information. However,
when thinking is costly, agents do not attain optimal (costless) outcomes, and market prices do not reflect all relevant information;
the financial market outcome deviates from the outcome predicated on the efficient markets hypothesis; and hence, financial markets
are not efficient.

2.2. Formal presentation

Decision-making is costly because (i) gathering information is costly, and (ii) given the information, thinking to determine an
optimal action is costly. The thinking cost brings to the fore the tradeoffs between the quality and the cost of the decision.4
This subsection incorporates the thinking cost into the formation of an investor's price expectation. The investor needs to form an
expectation for the asset's next-period price. To the extent that this expectation turns out to be wrong, she will suffer a loss. To the
extent that the investor devotes costly thinking to the formation of an accurate expectation, she will suffer a different loss. For
simplicity, suppose her loss function takes the form

(q (T ) − P )2 + CT . (1)

Here P denotes the logarithm of the next period's asset price; q(T) is the investor's expectation of P; T is the amount of thinking
devoted to the expectation formation; and C is the cost of thinking per unit of thinking. The expectation q(T) is indexed by T because
additional thinking will improve the expectation.
From in investor's point of view, both P and q(T) are random variables. P is random because next period's asset price is not
perfectly predictable; and q(T) is random because, at the outset, the investor does not know where her thinking will lead. To handle
the randomness, the investor takes the mathematical expectation of Eq. (1) as her objective function. That is, she minimizes

E [(q (T ) − P )2] + CT (2)

with respect to T, thus determining an optimal thinking effort T*. She then devotes this thinking effort level to expectation formation,
which results in a realization of the random expectation variable q(T*).
Now, consider a rewrite of Eq. (2). Let R denote the “rational expectation” of P in the conventional sense of that term; R is the
mathematical expectation of next-period's asset price P based on the true model of the economy and based on all information
currently available. According to the definition of R, the forecast error (R − P) is uncorrelated with [q(T) − R]. Therefore, the
objective function (2) may be rewritten as {E[(q(T) − R)2] + E[(P − R)2] + CT}. Since the second term of this expression is outside
the investor's control, the term can be neglected in the minimization; and the objective function may be shortened to

E [(q (T ) − R)2] + CT (3)

The objective function (3) invites the interpretation that the investor's job in constructing q(T) is to estimate R, which is a
convenient interpretation for making assumptions.
The investor's estimate q(T) of R is assumed to be a weighted combination of two estimators, a free estimator, denoted by f, and a
costly improvement, denoted by r(T), to the free estimator. The free estimator f is what the investor would use if she made a quick
judgment without any costly thinking. The free estimator f might be generated by some simple rule of thumb. The costly estimator r
(T) represents the additional insight yielded by thinking T devoted to analysis. To choose T sensibly, the investor must have some
sense of the accuracies of f and r(T) as estimators of R. Assume that the investor reasons as if

(i) r(T) is as accurate as a sample mean of T independent observations taken from a distribution with mean R and variance σ2;
(ii) f is as accurate as a sample mean of S independent observations taken from a distribution with mean R and variance σ2.

The analogy suggested by (i) is that the investor's analysis is like a mental sample of T thoughts, each of which gives an error-
perturbed bit of independent insight about R, where σ2 indicates the likely size of error. The suggestion of (ii) is, then, that the
investor's quick judgment is as good as S thoughts.
Assume that the investor takes (i) and (ii) to be true. The mathematical expectations are relative to the investor's subjective
beliefs. The objective accuracy of the beliefs also needs to be considered. Regarding (i), it might be assumed that the belief is indeed

3
For this literature, see Black (1993), Cootner (1964), De Bondt and Thaler (1986), DeLong, Shleifer, Summers, and Waldman (1990), Fama (1965, 1970),
Grossman (1976), Grossman and Stiglitz (1980), LeRoy (1973, 1989), Lo and MacKinlay (1988, 1999), Mandelbrot (1963), Mullainathan and Thaler (2000), Osborne
(1959), Plott and Sunder (1988), Russell and Thaler (1985), Samuelson (1965), and Thaler (1987).
4
For this literature, see Abreu and Rubinstein (1988), Aumann (1997), Conlisk (1988, 1993, 1996a, 1996b), Day (1993), Day and Tinney (1968), De Palma, Myers,
and Papageorgiou (1994), Ergin and Sarver (2010), Ermini (1991), Evans and Ramey (1992, 1995), Frey and Eichenberger (1994), Kurzban, Duckworth, Kable, and
Myers (2013), Manski (2017), Marschak and Radner (1972), Ofek, Yildiz, and Haruvy (2007), Papi (2012), Pingle (1992), Pingle and Day (1996), Pitz and Sachs
(1984), Radner (1975), Radner and Rothschild (1975), Rosenthal (1993), Rothschild (1975), Selten (1978), Smith and Walker (1993), Westbrook and Braver (2013,
2015), and Winston (1989). This subsection and the conclusion are based on Conlisk (1988).

3
K. Ardalan Global Finance Journal xxx (xxxx) xxx–xxx

objectively accurate, implying that the costly estimator r(T) is objectively unbiased and consistent. In that case, as T gets large, r(T)
would converge to R. The investor would be rational, since her thinking would converge to the right answer; but she would be
boundedly rational, since the convergence would take time. Regarding (ii), it might be assumed that the investor's belief can be
wrong, particularly with regard to bias. The investor's free expectation f is an initial guess, which may be based on a rule of thumb
such as an adaptive expectation. It makes sense for the investor to treat the guess as unbiased in estimating R (otherwise she would
use a different guess); but there is no good reason to suppose that an initial guess is objectively unbiased. Bias is one of the issues that
are costly to figure out.
In view of (i) and (ii), the apparent estimator q(T) of R for the investor is the weighted average of f and r(T) given by
q (T ) = [S⋅f + T ⋅r (T )]/(S + T ). (4)
Further, in view of (i) and (ii), E[q(T)] = R and E[(q(T) − R) ] = Var[q(T)] = σ /(S + T). Thus, the objective function (3)
2 2

becomes [σ2(S + T)− 1 + CT], which achieves a minimum with respect to T at

T ∗ = max[0, (C / σ 2)−½ − S ].

Thus, the investor's thinking effort T* will be small to the extent that thinking is costly relative to the size of the problem (large C/
σ2) and to the extent that the free estimator is reliable (large S). When these conditions hold with enough force, the corner solution
T* = 0 applies; the investor's free estimator f is good enough.
Substituting T = T* in Eq. (4) yields the investor's actual expectation. Let α = min [1, S(C/σ2)½]. Then
q (T ∗) = α⋅f + (1 − α )⋅r (T ∗). (5)
Thus, the relative weight on the free estimator f is large to the extent that thinking is costly relative to the size of the problem
(large C/σ2) and to the extent that the free estimator is reliable (large S).
Suppose that (i) is objectively true, so that r(T) converges to the rational expectation R as T gets large. Then, as the thinking cost C
goes to zero and the thinking effort T* goes to infinity, the estimator (5) goes to the rational expectation R. Thus, at the C = 0
extreme, the investor has unboundedly rational expectations. At the opposite extreme, for large enough thinking cost C, the thinking
effort T* is zero, the weight α equals one, and the estimator (5) is the free, or rule of thumb, estimator q(0) = f. Depending on
parameters, the investor may be anywhere between these extremes, and the specific location is determined by economic con-
siderations. That is, when thinking cost is included, an investor may be placed anywhere on the spectrum from unbounded rationality
to rule of thumb approximation.
The implication is that, when thinking is costly, in an enormously complex and changing real economy, agents, in general,
allocate economically viable amounts of thinking, and therefore do not incorporate all available information into their decisions.
Consequently, market prices do not reflect all available information, a result that is contrary to the efficient markets hypothesis.

3. Conclusion

This paper uses a simple model that incorporates thinking cost through specifying a technology by which an agent, given her
information, seeks to make a good decision. The agent can make a quick decision for free, the agent is uncertain about the accuracy of
the free decision, costly thinking will improve the expected accuracy of the final decision, and the agent's choice problem thus
includes the choice of how much thinking effort to expend—a choice that leads to the problem of infinite regress.
Suppose there is an optimization problem that neglects thinking cost, even though the thinking cost is, in fact, positive. Further
suppose that, to remedy this misspecification, the neglected thinking cost can be folded back into the problem. This, then, creates a
second optimization problem that includes the cost of solving the first. But the second problem will have its own thinking cost, and
that cost will now be neglected. The problem has circled back to the original misspecification—an optimization model that suppresses
a thinking cost. Nonetheless, one might expect the second optimization problem to generate better insights than the first. The second
problem will bring thinking cost to the surface; and it will explicitly recognize an otherwise neglected tradeoff between decision
quality and decision cost (i.e., thinking cost). One could think of forming a third optimization problem that folds in the thinking cost
of the second, but such logical circling could go on indefinitely, since we would never arrive at an optimization problem that fully
incorporates the thinking cost of its own solution. Call this the “circularity problem.” The discouraging implication of the circularity
problem is that thinking cost cannot be completely handled in an optimization model. Therefore the model used in this paper must be
viewed as suggestive, rather than as a strict hypothesis. Like any optimization model, the model does not include the thinking cost of
its own solution. Nonetheless, the model seems to make a better compromise with the thinking cost issue than does a model that
ignores the thinking cost entirely. In this model, the investor recognizes an otherwise neglected tradeoff between decision cost (i.e.,
thinking cost) and decision accuracy; she chooses a point on the tradeoff in a sensible way; her choice rationalizes the use of an initial
guess, such as an adaptive expectation; and her choice reacts sensibly to changes in underlying parameters.
In the model used in this paper, the agent's free decision may well be based on adaptation, suboptimization, imitation, or some
other ingredient from the literature on bounded rationality. Thus, the modelling approach goes well with bounded rationality in-
gredients. The agent's costly thinking to improve her free decision can be thought of as sampling from a distribution with mean equal
to the most accurate decision—the optimum under zero thinking cost. Thus, the modelling approach goes well with conventional
rational expectations ingredients. Since the context resembles an optimal sampling context, standard sampling theory can be used in
putting ingredients together. The relative importance of bounded and unbounded rationality ingredients in a particular model is
determined within the model on the basis of economic tradeoffs. These tradeoffs due to costly thinking construct a situation where a

4
K. Ardalan Global Finance Journal xxx (xxxx) xxx–xxx

typical agent does not use all the available information in her decision making, and therefore market prices do not reflect all available
information—a result that contradicts the efficient markets hypothesis. If we had included the cost of the thinking that is necessary to
solve the optimization problem (recall the infinite regress problem discussed above), we would have gotten an even stronger rejection
of the efficient markets hypothesis, as larger thinking costs would drive agents further away from the rational expectations solution.
Again, decision-making is costly because: (i) gathering information is costly, and (ii) given the information, thinking out an
optimal action is costly. The literature on information cost has shown the impossibility of informationally efficient markets
(Grossman & Stiglitz, 1980). The current paper has shown, in addition, that when thinking is costly, markets cannot be efficient.

References

Abreu, D., & Rubinstein, A. (1988). The structure of Nash equilibrium in repeated games with finite automata. Econometrica, 56, 1259–1281.
Aggarwal, R. (2014). Animal spirits in financial economics: A review of deviations from economic rationality. International Review of Financial Analysis, 32, 179–187.
Akerlof, G. A., & Shiller, R. J. (2009). Animal spirits: How psychology drives the economy, and why it matters for global capitalism. Princeton, NJ: Princeton University Press.
Altman, M. (Ed.). (2006). Handbook of contemporary behavioral economics: Foundations and developments. New York: Sharpe.
Aumann, R. J. (1997). Rationality and bounded rationality. Games and Economic Behavior, 21, 2–14.
Bargh, J. A. (1984). Automatic and conscious processing of social information. In R. S. WyerJr., & T. K. Srull (Eds.). Handbook of social cognition (pp. 1–43). Hillsdale,
NJ: Erlbaum.
Bargh, J. A. (1997). The automaticity of everyday life. In R. S. WyerJr. (Vol. Ed.), The automaticity of everyday life: Advances in social cognition. Vol. 10. The automaticity
of everyday life: Advances in social cognition (pp. 1–61). Mahwah, NJ: Erlbaum.
Bargh, J. A., Chaiken, S., Raymond, P., & Hymes, C. (1996). The automatic evaluation effect: Unconditional automatic attitude activation with a pronunciation task.
Journal of Experimental Social Psychology, 32, 104–128.
Bargh, J. A., & Chartrand, T. L. (1999). The unbearable automaticity of being. American Psychologist, 54, 462–479.
Black, F. (1993). Noise. In R. H. Thaler (Ed.). Advances in behavioral finance (pp. 3–22). New York: Russell Sage Foundation.
Brzezick, J., & Wisniewski, R. (2014). Homo economicus and behavioral economics. Contemporary Economics, 8, 353–364.
Camerer, C. F. (2006). Behavioral economics. In R. Blundell, W. Newey, & T. Persson (Eds.). Advances in economics and econometrics: Theory and applications (pp. 181–
214). Cambridge: Cambridge University Press Ninth World Congress.
Camerer, C. F. (2007). Neuroeconomics: Using neuroscience to make economic predictions. Economic Journal, 117, 26–42.
Camerer, C. F. (2008). The case for mindful economics. In A. Caplin, & A. Schotter (Eds.). The foundations of positive and normative economics: A handbook (pp. 43–69).
Oxford: Oxford University Press.
Camerer, C. F., & Loewenstein, G. (2004). Behavioral economics: Past, present, and future. In C. F. Camerer, G. Loewenstein, & M. Rabin (Eds.). Advances in behavioral
economics (pp. 3–51). Princeton, NJ: Princeton University Press.
Camerer, C. F., Loewenstein, G., & Prelec, D. (2004). Neuroeconomics: Why economics needs brains. Scandinavian Journal of Economics, 106, 555–579.
Camerer, C. F., Loewenstein, G., & Prelec, D. (2005). Neuroeconomics: How neuroscience can inform economics. Journal of Economic Literature, 43, 9–64.
Clore, G. L. (1992). Cognitive phenomenology: Feelings and the construction of judgment. In L. L. Martin, & A. Tesser (Eds.). The construction of social judgments (pp.
133–163). Hillsdale, NJ: Erlbaum.
Cohen, J. D. (2005). The vulcanization of the human brain: A neural perspective on interactions between cognition and emotion. Journal of Economic Perspectives, 19,
3–24.
Conlisk, J. (1988). Optimization cost. Journal of Economic Behavior and Organization, 9, 213–228.
Conlisk, J. (1993). Adaptive firms and random innovations in a model of cyclical output growth. In R. H. Day, & P. Chen (Eds.). Nonlinear dynamics and evolutionary
economics (pp. 113–130). Oxford: Oxford University Press.
Conlisk, J. (1996a). Bounded rationality and market fluctuations. Journal of Economic Behavior and Organization, 29, 233–250.
Conlisk, J. (1996b). Why bounded rationality. Journal of Economic Literature, 34, 669–700.
Cootner, P. (1964). The random character of stock market prices. London: Risk Publications.
Damasio, A. R. (2008). Descartes' error: Emotion, reason, and the human brain. New York: Random House.
Day, R. H. (1993). Bounded rationality and the coevolution of market and state. In R. H. Day, G. Eliasson, & C. Wihlborg (Eds.). The markets for innovation, ownership
and control (pp. 57–79). Amsterdam: North-Holland.
Day, R. H., & Tinney, E. H. (1968). How to co-operate in business without really trying: A learning model of decentralized decision making. Journal of Political
Economy, 76, 583–600.
De Bondt, W. F. M., Muradoglu, G., Shefrin, H., & Staikouras, S. K. (2008). Behavioral finance: Quo vadis? Journal of Applied Finance, 18, 7–21.
De Bondt, W. F. M., & Thaler, R. H. (1986). Does the stock market overreact? Journal of Finance, 40, 793–807.
De Palma, A., Myers, G. M., & Papageorgiou, Y. Y. (1994). Rational choice under an imperfect ability to choose. American Economic Review, 84, 419–440.
DeLong, J. B., Shleifer, A., Summers, L., & Waldman, R. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98, 703–738.
Edwards, D.. What is neurofinance? (2017). http://BrainWaves.Corante.com/Archives/2004/08/09/What_Is_Neurofinance.PHP (consulted July 15, 2017).
Elster, J. (1998). Emotions and economic theory. Journal of Economic Literature, 36, 47–74.
Ergin, H., & Sarver, T. (2010). A unique costly contemplation representation. Econometrica, 78, 1285–1339.
Ermini, L. (1991). Hierarchical decomposition in economic analysis. In R. Frantz, H. Singh, & J. Gerber (Vol. Eds.), Behavioral decision making: Handbook of behavioral
economics. Vol. 2B. Behavioral decision making: Handbook of behavioral economics (pp. 547–562). Greenwich, CT: JAI Press.
Evans, G. W., & Ramey, G. (1992). Expectation calculation and macroeconomic dynamics. American Economic Review, 82, 207–224.
Evans, G. W., & Ramey, G. (1995). Expectation calculation, hyperinflation and currency collapse. In H. D. Dixon, & N. Rankin (Eds.). The new macroeconomics: Imperfect
markets and policy effectiveness (pp. 307–336). Cambridge: Cambridge University Press.
Evstigneev, I. V., Schenk-Hoppe, K. R., & Ziemba, W. T. (2013). Introduction: Behavioral and evolutionary finance. Annals of Finance, 9, 115–119.
Fama, E. (1965). The behavior of stock market prices. Journal of Business, 38, 34–105.
Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25, 383–417.
Fellows, L. K. (2004). The cognitive neuroscience of human decision making: A review and conceptual framework. Journal of Cognitive Neuroscience, 3, 159–172.
Frey, B. S., & Eichenberger, R. (1994). Economic incentives transform psychological anomalies. Journal of Economic Behavior and Organization, 23, 215–234.
Gabaix, X., & Laibson, D. (2000). A boundedly rational decision algorithm. American Economic Review, 90, 433–438.
Gilovich, T., & Griffin, D. (2002). Introduction—Heuristics and biases: Then and now. In T. Gilovich, D. Griffin, & D. Kahneman (Eds.). Heuristics and biases: The
psychology of intuitive judgment (pp. 1–18). Cambridge: Cambridge University Press.
Goetz, J., & James, R. N., III (2008). Human choice and the emerging field of neuroeconomics: A review of brain science for the financial planner. Journal of Personal
Finance, 6, 13–36.
Grossman, S. J. (1976). On the efficiency of competitive stock markets where traders have diverse information. Journal of Finance, 31, 573–585.
Grossman, S. J., & Stiglitz, J. (1980). On the impossibility of informationally efficient markets. American Economic Review, 70, 393–408.
Harrison, G. W. (2008). Neuroeconomics: A critical reconsideration. Economics and Philosophy, 24, 303–344.
Hirshleifer, D. (2001). Investor psychology and asset pricing. Journal of Finance, 56, 1533–1597.
Hogarth, R. M., & Reder, M. W. (1987). Introduction: Perspectives from economics and psychology. In R. M. Hogarth, & M. W. Reder (Eds.). Rational choice: The contrast
between economics and psychology (pp. 1–23). Chicago: University of Chicago Press.

5
K. Ardalan Global Finance Journal xxx (xxxx) xxx–xxx

Jones, B. D. (1999). Bounded rationality. Annual Review of Political Science, 2, 297–321.

Kahneman, D. (2003a). A psychological perspective on economics. American Economic Review, 93, 162–168.
Kahneman, D. (2003b). Maps of bounded rationality: Psychology for behavioral economics. American Economic Review, 93, 1449–1475.
Kahneman, D. (2011). Thinking, fast and slow. New York: Farrar, Straus, and Giroux.
Kahneman, D., Slovic, P., & Tversky, A. (1982). Judgment under uncertainty: Heuristics and biases. Cambridge: Cambridge University Press.
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision-making under risk. Econometrica, 47, 263–292.
Kenning, P., & Plassmann, H. (2005). NeuroEconomics: An overview from an economic perspective. Brain Research Bulletin, 67, 343–354.
Knutson, B., & Bossaerts, P. (2007). Neural antecedents of financial decisions. Journal of Neuroscience, 27, 8174–8177.
Kuhnen, C. M., & Knutson, B. (2005). The neural basis of financial risk taking. Neuron, 47, 763–770.
Kuhnen, C. M., & Knutson, B. (2011). The influence of affect on beliefs, preferences and financial decisions. Journal of Financial and Quantitative Analysis, 46, 605–626.
Kuorikoski, J., & Ylikoski, P. (2010). Explanatory relevance across disciplinary boundaries: The case of neuroeconomics. Journal of Economic Methodology, 17,
219–228.
Kurzban, R., Duckworth, A., Kable, J. W., & Myers, J. (2013). An opportunity cost model of subjective effort and task performance. Behavioral and Brain Sciences, 36,
661–726.
LeRoy, S. F. (1973). Risk aversion and the martingale property of stock returns. International Economic Review, 14, 436–446.
LeRoy, S. F. (1989). Efficient capital markets and martingales. Journal of Economic Literature, 27, 1583–1621.
Lo, A., & MacKinlay, C. (1988). Stock market prices do not follow random walks: Evidence from a simple specification test. Review of Financial Studies, 1, 41–66.
Lo, A., & MacKinlay, C. (1999). A non-random walk down Wall Street. Princeton: Princeton University Press.
Loewenstein, G. (1996). Out of control: Visceral influences on behavior. Organizational Behavior and Human Decision Processes, 65, 272–292.
Loewenstein, G. F., & Lerner, J. S. (2003). The role of affect in decision making. In R. J. Davidson, K. R. Scherer, & H. H. Goldsmith (Eds.). Handbook of affective sciences
(pp. 619–642). Oxford: Oxford University Press.
Logan, G. D. (1989). Automaticiy and cognitive control. In J. S. Uleman, & J. A. Bargh (Eds.). Unintended thought (pp. 52–74). New York: Guilford Press.
Lohrenz, T., & Montague, P. R. (2008). Neuroeconomics: What neuroscience can learn from economics. In A. Lewis (Ed.). The Cambridge handbook of psychology and
economic behavior (pp. 457–492). Cambridge: Cambridge University Press.
Mandelbrot, B. (1963). The variation of certain speculative prices. Journal of Business, 36, 394–419.
Manski, C. F. (2017). Optimize, satisfice, or choose without deliberation? A simple minimax-regret assessment. Theory and Decision, 83, 155–173.
Marschak, J., & Radner, R. (1972). Economic theory of teams. New Haven: Yale University Press.
Mullainathan, S., & Thaler, R. H. (2000). Behavioral economics. International encyclopedia of the social and behavioral sciences (pp. 1094–1099). Cambridge, MA: MIT
Press.
Ofek, E., Yildiz, M., & Haruvy, E. (2007). The impact of prior decisions on subsequent valuations in a costly contemplation model. Management Science, 53, 1217–1233.
Osborne, M. (1959). Brownian motion in the stock market. Operations Research, 7, 145–173.
Papi, M. (2012). Satisficing choice procedures. Journal of Economic Behavior and Organization, 84, 451–462.
Payzan-LeNestour, E.. What is neurofinance? (2017). http://WWW.ElisePayzan.Com/Neurofinance-Definition/ (consulted July 15, 2017).
Peterson, R. L. (2008). Affect and financial decision-making: How neurofinance can inform market participants. Journal of Behavioral Finance, 8, 70–78.
Peterson, R. L. (2010). Neuroeconomics and neurofinance. In H. K. Baker, & J. R. Nofsinger (Eds.). Behavioral finance: Investors, corporations, and markets (pp. 73–94).
Hoboken, NJ: Wiley.
Peterson, R. L.. Neurofinance. (2017). WWW.MarketPsych.Com/Neurofinance.PHP (consulted July 15, 2017).
Pingle, M. A. (1992). Costly optimization: An experiment. Journal of Economic Behavior and Organization, 17, 3–30.
Pingle, M. A., & Day, R. H. (1996). Modes of economizing behavior: Experimental evidence. Journal of Economic Behavior and Organization, 29, 191–209.
Pitz, G. F., & Sachs, N. J. (1984). Judgment and decision: Theory and application. Annual Review of Psychology, 35, 139–163.
Plott, C. R., & Sunder, S. (1988). Rational expectations and the aggregation of diverse information in laboratory security markets. Econometrica, 56, 1085–1118.
Rabin, M. (1998). Psychology and economics. Journal of Economic Literature, 36, 11–46.
Rabin, M. (2002). A perspective on psychology and economics. European Economic Review, 46, 657–685.
Radner, R. (1975). Satisficing. Journal of Mathematical Economics, 2, 253–262.
Radner, R., & Rothschild, M. (1975). On the allocation of effort. Journal of Economic Theory, 10, 358–376.
Romer, P. M. (2000). Thinking and feeling. American Economic Review, 90, 439–443.
Rosenthal, R. W. (1993). Rules of thumb in games. Journal of Economic Behavior and Organization, 22, 1–14.
Rothschild, M. (1975). Further notes on the allocation of effort. In R. H. Day, & T. Groves (Eds.). Adaptive economic models (pp. 195–220). New York: Academic Press.
Russell, T., & Thaler, R. H. (1985). The relevance of quasi rationality in competitive markets. American Economic Review, 75, 1071–1082.
Sahi, S. K. (2012). Neurofinance and investment behavior. Studies in Economics and Finance, 29, 246–267.
Samuelson, P. (1965). Proof that properly anticipated prices fluctuate randomly. Industrial Management Review, 6, 41–49.
Sanfey, A. G., Loewenstein, G., McClure, S. M., & Cohen, J. D. (2006). Neuroeconomics: Cross-currents in research on decision-making. Trends in Cognitive Science, 10,
108–116.
Sapra, S. G., & Zak, P. J.. Neurofinance: Bridging psychology, neurology, and investor behavior. (2017). http://Papers.SSRN.Com/SO13/Papers.CFM?Abstract_ID=
1323051 (consulted July 15, 2017).
Schelling, T. C. (1978). Egonomics, or the art of self-management. American Economic Review, 68, 290–294.
Schneider, W., & Shiffrin, R. M. (1977). Controlled and automatic human information processing: I. Detection, search and attention. Psychological Review, 84, 1–66.
Selten, R. (1978). The chain store paradox. Theory and Decision, 9, 127–159.
Shefrin, H. (2001). Behavioral finance. Cheltenham, UK: Edward Elgar.
Shefrin, H. (2002). Beyond greed and fear: Understanding behavioral finance and the psychology of investing. Oxford: Oxford University Press.
Shiffrin, R. M., & Schneider, W. (1977). Controlled and automatic human information processing: II. Perceptual learning, automatic attending and a general theory.
Psychological Review, 84, 127–190.
Shiller, R. J. (2000). Irrational exuberance. Princeton, NJ: Princeton University Press.
Shiller, R. J. (2003). From efficient markets theory to behavioral finance. Journal of Economic Perspectives, 17, 83–104.
Shiv, B., & Fedorikhin, A. (1999). Heart and mind in conflict: The interplay of affect and cognition in consumer decision making. Journal of Consumer Research, 26,
278–292.
Shleifer, A. (2000). Inefficient markets: An introduction to behavioral finance. Oxford: Oxford University Press.
Simon, H. A. (1955). A behavioral model of rational choice. Quarterly Journal of Economics. 69, 99–118.
Simon, H. A. (1956). Rational choice and the structure of the environment. Psychological Review, 63, 129–138.
Simon, H. A. (1957). Models of man: Social and rational—Mathematical essays on rational human behavior in a social setting. New York: John Wiley and Sons.
Simon, H. A. (1959). Theories of decision-making in economics and behavioral science. American Economic Review, 49, 253–283.
Simon, H. A. (1967). Motivational and emotional controls of cognition. Psychological Review, 74, 29–39.
Simon, H. A. (1976). From substantive to procedural rationality. In S. J. Latsis (Ed.). Methods and appraisal in economics (pp. 129–148). Cambridge: Cambridge
University Press.
Simon, H. A. (1978). Rationality as process and product of thought. American Economic Review Proceedings, 68, 1–16.
Simon, H. A. (1982). Models of bounded rationality. Cambridge, MA: MIT Press.
Simon, H. A. (1987). Rationality in psychology and economics. In R. M. Hogarth, & M. W. Reder (Eds.). Rational choice: The contrast between economics and psychology
(pp. 25–40). Chicago: University of Chicago Press.
Simon, H. A. (1992). Economics, bounded rationality and the cognitive revolution. Aldershot, UK: Edward Elgar.
Simon, H. A. (2000). Barriers and bounds to rationality. Structural Change and Economic Dynamics, 11, 243–253.

6
K. Ardalan Global Finance Journal xxx (xxxx) xxx–xxx

Slovic, P., Finucane, M., Peters, E., & MacGregor, D. G. (2002). The affect heuristic. In T. Gilovich, D. Griffin, & D. Kahneman (Eds.). Heuristics and biases: The
psychology of intuitive thought (pp. 397–420). Cambridge: Cambridge University Press.
Smith, V. L. (2005). Behavioral economics research and the foundations of economics. Journal of Socio-Economics, 34, 135–150.
Smith, V. L., & Walker, J. M. (1993). Monetary rewards and decision cost in experimental economics. Economic Inquiry, 31, 245–261.
Statman, M. (1999). Behavioral finance: Past battles and future engagements. Financial Analysts Journal, 55, 18–27.
Szyszka, A. (2013). Behavioral finance and capital markets: How psychology influences investors and corporations. New York: Palgrave Macmillan.
Thaler, R. H. (1987). Seasonal movements in security prices. II. Weekend, holiday, turn of the month, and intraday effects. Journal of Economic Perspectives, 1, 169–177.
Thaler, R. H. (Ed.). (1993). Advances in behavioral finance. New York: Russell Sage Foundation.
Thaler, R. H. (2000). From homo economicus to homo sapiens. Journal of Economic Perspectives, 14, 133–141.
Tseng, K. C. (2006). Behavioral finance, bounded rationality, neuro-finance, and traditional finance. Investment Management and Financial Innovations, 3, 7–18.
Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211, 453–458.
Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5, 297–323.
Westbrook, J. A., & Braver, T. S. (2013). The economics of cognitive effort. Behavioral and Brain Sciences, 36, 704–705.
Westbrook, J. A., & Braver, T. S. (2015). Cognitive effort: A neuroeconomic approach. Cognitive, Affective and Behavioral Neuroscience, 15, 395–415.
Wills, L.. An introduction to neurofinance. (2017). WWW.AtcBiz.Com.au/ChronicleArticles.PHP?New=y4j0zr65 (consulted July 15, 2017).
Winkielman, P., & Berridge, K. C. (2004). Unconscious emotion. Current Directions in Psychological Science, 13, 120–123.
Winston, G. C. (1989). Imperfectly rational choice: Rationality as the result of a costly activity. Journal of Economic Behavior and Organization, 12, 67–86.
Zajonc, R. B. (1984). On the primacy of affect. American Psychologist, 39, 117–123.
Zak, P. (2004). Neuroeconomics. Philosophical Transactions of the Royal Society of London, 359, 1737–1748.
Zaleskiewics, T. (2006). Behavioral finance. In M. Altman (Ed.). Handbook of contemporary behavioral economics: Foundations and developments (pp. 706–728). Armonk,
NJ: M. E. Sharpe.