Abstract
This note investigates the impact of investors’ memory limitations on stock-market prices. I consider a simple asset-pricing model in which investors allocate limited cognitive resources to retrieve information from memory and to learn about the data generating process of multiple assets. I show that the proposed framework may shed light into a number of empirical ‘anomalies’, including the excess volatility and excess premium of risky assets and the lower return and volatility of more familiar (e.g. large size) stocks.
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