Studies of human memory indicate that features of an event
evoke memories of prior associated contextual states, which in turn
become associated with the current event’s features. This
retrieved-context mechanism allows the remote past to influence the present, even as agents
gradually update their beliefs about their environment. We apply a
version of retrieved context theory, drawn from the literature on
human memory, to explain three types of evidence in the financial
economics literature: the role of early life experience in shaping investment choices, occurrence of financial crises, and the impact of fear on asset allocation. These applications suggest a
recasting of neoclassical rational expectations in terms of beliefs as
governed by principles of human memory.