Behavioral Portfolio Analysis of Individual Investors
45 Pages Posted: 24 Jun 2010 Last revised: 5 Oct 2010
Date Written: 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.
Keywords: Behavioral Portfolio Theory, Investment Decisions, Investor Performance, Behavioral Finance
JEL Classification: G11, G24
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Investor Competence, Trading Frequency, and Home Bias
By John R. Graham, Campbell R. Harvey, ...
-
Investor Competence, Trading Frequency, and Home Bias
By John R. Graham, Campbell R. Harvey, ...
-
Sensation Seeking, Overconfidence, and Trading Activity
By Mark Grinblatt and Matti Keloharju
-
Talk and Action: What Individual Investors Say and What They Do
By Daniel Dorn and Gur Huberman
-
Overconfidence and Trading Volume
By Markus Glaser and Martin Weber
-
Overconfidence and Trading Volume
By Markus Glaser and Martin Weber
-
Overconfidence and Trading Volume
By Markus Glaser and Martin Weber
-
Overconfidence and Trading Volume
By Markus Glaser and Martin Weber
-
An Experimental Test of the Impact of Overconfidence and Gender on Trading Activity
By Richard Deaves, Erik Lueders, ...