Abstract

http://ssrn.com/abstract=1629786
 
 

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Behavioral Portfolio Analysis of Individual Investors


Arvid O. I. Hoffmann


Maastricht University - School of Business and Economics - Department of Finance; Network for Studies on Pensions, Aging and Retirement (Netspar)

Hersh Shefrin


Santa Clara University - Leavey School of Business

Joost M. E. Pennings


Maastricht University

June 24, 2010


Abstract:     
Existing studies on individual investors’ decision-making often rely on observable socio-demographic variables to proxy for underlying psychological processes that drive investment choices. Doing so implicitly ignores the latent heterogeneity amongst investors in terms of their preferences and beliefs that form the underlying drivers of their behavior. To gain a better understanding of the relations among individual investors’ decision-making, the processes leading to these decisions, and investment performance, this paper analyzes how systematic differences in investors’ investment objectives and strategies impact the portfolios they select and the returns they earn. Based on recent findings from behavioral finance we develop hypotheses which are tested using a combination of transaction and survey data involving a large sample of online brokerage clients. In line with our expectations, we find that investors driven by objectives related to speculation have higher aspirations and turnover, take more risk, judge themselves to be more advanced, and underperform relative to investors driven by the need to build a financial buffer or save for retirement. Somewhat to our surprise, we find that investors who rely on fundamental analysis have higher aspirations and turnover, take more risks, are more overconfident, and outperform investors who rely on technical analysis. Our findings provide support for the behavioral approach to portfolio theory and shed new light on the traditional approach to portfolio theory.

Number of Pages in PDF File: 45

Keywords: Behavioral Portfolio Theory, Investment Decisions, Investor Performance, Behavioral Finance

JEL Classification: G11, G24

working papers series


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Date posted: June 24, 2010 ; Last revised: October 5, 2010

Suggested Citation

Hoffmann, Arvid O. I. and Shefrin, Hersh and Pennings, Joost M. E., Behavioral Portfolio Analysis of Individual Investors (June 24, 2010). Available at SSRN: http://ssrn.com/abstract=1629786 or http://dx.doi.org/10.2139/ssrn.1629786

Contact Information

Arvid O. I. Hoffmann (Contact Author)
Maastricht University - School of Business and Economics - Department of Finance ( email )
P.O. Box 616
NL- 6200 MD Maastricht
Netherlands
+31 (0) 6 18685678 (Phone)
HOME PAGE: http://www.arvidhoffmann.com
Network for Studies on Pensions, Aging and Retirement (Netspar)
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Hersh M. Shefrin
Santa Clara University - Leavey School of Business ( email )
Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)
Joost M. E. Pennings
Maastricht University ( email )
P.O. Box 616
Maastricht, 6200MD
Netherlands
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