Chapter 23: Behavioral Portfolio Theory and Investment Management
Investor Behavior: The Psychology of Financial Planning and Investing. H. Kent Baker and Victor Ricciardi, editors, 421-438, Hoboken, NJ: John Wiley & Sons, Inc. , 2014.
Posted: 31 May 2014
Date Written: February 10, 2014
This chapter focuses on the attitude of investors toward financial gains and losses and their decisions on wealth allocation, and how these changes are subject to behavioral factors. The focal point is the integration of behavioral elements into the classic portfolio optimization. Individual perceptions are modeled according to four separate frameworks that build on each other: prospect theory, safety-first portfolio theory, security-potential/aspiration (SP/A) theory, and behavioral portfolio theory. SP/A theory evolves from safety-first portfolio theory and the introduction of aspiration level. The behavioral portfolio theory integrates the idea of mental accounts from prospect theory with the portfolio optimization framework of the SP/A theory and in this way it creates a unified model. The last part of the discussion addresses the behavioral asset pricing model (BAPM).
Keywords: Mental accounting, loss aversion, prospect theory, security-potential/aspiration theory, behavioral portfolio theory, behavioral asset pricing model, behavioral finance, financial psychology, behavioural finance, behavioral economics, behavioural economics
JEL Classification: A12, D81, G00, G30, G10, M00, M10, M41
Suggested Citation: Suggested Citation