Re-Evaluating the Value of Modern Portfolio Theory and Asset Pricing Models Based on Behavioral Insights from Benjamin Graham's Value Investing Paradigm

33 Pages Posted: 5 Jun 2017  

Eben Otuteye

Faculty of Business Administration, University of New Brunswick

Mohammad Siddiquee

Faculty of Business, University of New Brunswick

Date Written: June 3, 2017

Abstract

Modern Portfolio Theory, the Capital Asset Pricing Model, and the Efficient Market Hypothesis are cornerstone concepts in both academic and professional curricula. In spite of their long history and reputation, the CAPM and its extensions do not yield satisfactory empirical results. We argue that this is because these models ignore the impact of human behavior in financial markets. We present a critique of these standard models using behavioral insights from Benjamin Graham’s value investing paradigm. We propose that if, instead of getting fixated on investors’ optimal rational decision making, we adopt Benjamin Graham’s value investing perspective which explicitly acknowledges that investor decision making is by definition imperfect due to psychological biases, we could derive better investment decision making processes.

Keywords: Modern Portfolio Theory, Capital Asset Pricing Model, Efficient Market Hypothesis, Benjamin Graham, Value Investing, Behavioral Finance

JEL Classification: G02, G11, G12, G14

Suggested Citation

Otuteye, Eben and Siddiquee, Mohammad, Re-Evaluating the Value of Modern Portfolio Theory and Asset Pricing Models Based on Behavioral Insights from Benjamin Graham's Value Investing Paradigm (June 3, 2017). Available at SSRN: https://ssrn.com/abstract=2980453 or http://dx.doi.org/10.2139/ssrn.2980453

Eben Otuteye

Faculty of Business Administration, University of New Brunswick ( email )

Fredericton, New Brunswick E3B5A3
Canada

Mohammad Siddiquee (Contact Author)

Faculty of Business, University of New Brunswick ( email )

Philip W. Oland Hall
100 Tucker Park Road
Saint John, New Brunswick E2L 4L5
Canada
(506) 648 5810 (Phone)

HOME PAGE: http://www.unb.ca

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