When Behavioral Portfolio Theory Meets Markowitz Theory

48 Pages Posted: 5 Oct 2013 Last revised: 24 Jul 2019

See all articles by Marie Pfiffelmann

Marie Pfiffelmann

EM Strasbourg.University of Strasbourg. LARGE

Tristan Roger

Université Paris-Dauphine, PSL Research University

Olga Bourachnikova

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)

Date Written: October 20, 2015

Abstract

The Behavioral Portfolio Theory (BPT) developed by Shefrin and Statman (2000) is often set against Markowitz's (1952) Mean Variance Theory (MVT). In this paper, we compare the asset allocations generated by BPT and MVT without restrictions. Using U.S. stock prices from the CRSP database for the 1995-2011 period, this paper is the first study that empirically determines the BPT optimal portfolio. We show that the Shefrin and Statman's (2000) optimal portfolio is Mean Variance (MV) efficient in more than 70% of cases. However, our results also indicate that the BPT portfolio exhibits a high level of risk, high returns and positively skewed returns. We show that the risk aversion coefficient of the BPT portfolio is up to 10 times lower than the risk aversion degree shown by typical MV investors. Even if the asset allocations may coincide, typical MV investors will not usually select the BPT optimal portfolios. These results underline that MVT and BPT cannot be used interchangeably.

Keywords: Behavioral Portfolio Theory, Mean Variance Theory, Portfolio optimization, Decision making

Suggested Citation

Pfiffelmann, Marie and Roger, Tristan and Bourachnikova, Olga, When Behavioral Portfolio Theory Meets Markowitz Theory (October 20, 2015). Economic Modelling 53, February 2016. Available at SSRN: https://ssrn.com/abstract=2336148 or http://dx.doi.org/10.2139/ssrn.2336148

Marie Pfiffelmann (Contact Author)

EM Strasbourg.University of Strasbourg. LARGE ( email )

61, avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

HOME PAGE: http://ifs.u-strasbg.fr/large/pagesperso/affinfos.php3?id=37

Tristan Roger

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

Olga Bourachnikova

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie) ( email )

61 Avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

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