Siddiqi, Hammad (2011): Thinking by analogy, systematic risk, and option prices.

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Abstract
People tend to think by analogies and comparisons. Such way of thinking, termed coarse thinking by Mullainathan et al [Quarterly Journal of Economics, May 2008] is intuitively very appealing. We develop a new option pricing model based on the idea that the market consists of coarse thinkers as well as rational investors when limits to arbitrage (transaction costs) prevent rational investors from profiting at the expense of coarse thinkers. The new formula, which is a closed form solution to the model, is a generalization of the BlackScholes formula. The new formula potentially provides a unified explanation for various implied volatility puzzles.
Item Type:  MPRA Paper 

Original Title:  Thinking by analogy, systematic risk, and option prices 
English Title:  Thinking by Analogy, Systematic Risk, and Option Prices 
Language:  English 
Keywords:  Coarse Thinking, Option Pricing, Implied Volatility, Implied Volatility Skew, Systematic Risk, Investor Sentiment, Implied Volatility Term Structure 
Subjects:  G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  31316 
Depositing User:  Hammad Siddiqi 
Date Deposited:  07. Jun 2011 16:18 
Last Modified:  26. Jul 2015 01:09 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/31316 