A Critique of Modern Portfolio Theory and Asset Pricing Models Based on Behavioral Insights from Benjamin Graham's Value Investing Paradigm

30 Pages Posted: 6 Sep 2017

See all articles by Eben Otuteye

Eben Otuteye

Faculty of Management, University of New Brunswick

Mohammad Siddiquee

Department of Business Administration and Tourism and Hospitality Management, Mount Saint Vincent University

Date Written: August 31, 2017

Abstract

Modern Portfolio Theory, the Capital Asset Pricing Model, and the Efficient Market Hypothesis are the cornerstone concepts in both academic and professional curricula. In spite of their long history and reputation, the CAPM and its extensions are not able to yield satisfactory empirical results. We argue that this is because the modelling process ignored 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 primarily due to psychological biases, we would be able to derive better investment decision making processes.

Keywords: behavioral finance, value investing, asset pricing, volatility, history of thought

JEL Classification: G02, G11, G12

Suggested Citation

Otuteye, Eben and Siddiquee, Mohammad, A Critique of Modern Portfolio Theory and Asset Pricing Models Based on Behavioral Insights from Benjamin Graham's Value Investing Paradigm (August 31, 2017). Available at SSRN: https://ssrn.com/abstract=3031382 or http://dx.doi.org/10.2139/ssrn.3031382

Eben Otuteye (Contact Author)

Faculty of Management, University of New Brunswick ( email )

Fredericton, New Brunswick E3B5A3
Canada

Mohammad Siddiquee

Department of Business Administration and Tourism and Hospitality Management, Mount Saint Vincent University ( email )

166 Bedford Highway
Halifax, Nova Scotia B3M 2J6
Canada
902-457-6931 (Phone)
902-445-2582 (Fax)

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

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