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Behavioral Portfolio Analysis of Individual Investors

45 Pages Posted: 24 Jun 2010 Last revised: 5 Oct 2010

Arvid O. I. Hoffmann

University of Adelaide - Business School; Network for Studies on Pensions, Aging and Retirement (Netspar)

Hersh Shefrin

Santa Clara University - Leavey School of Business

Joost M. E. Pennings

Maastricht University

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

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

Arvid O. I. Hoffmann (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Network for Studies on Pensions, Aging and Retirement (Netspar)

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Hersh 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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