behavioral portfolio theory



Behavioral portfolio theory (BPT), put forth in 2000 by Shefrin and Statman,SHEFRIN, H., AND M. STATMAN (2000): "Behavioral Portfolio Theory," ''Journal of Financial and Quantitative Analysis'', 35(2), 127–151. provides an alternative to the assumption that the ultimate motivation for investors is the maximization of the value of their portfolios. It suggests that investors have varied aims and create an investment portfolio that meets a broad range of goals.{{cite web, last=Bank, first=Eric, title=Behavioral Portfolio Theory 1 – Safety First, date= 18 February 2011, url=, accessdate=7 September 2011 It does not follow the same principles as the
capital asset pricing model In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. The model takes into accou ...
modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificati ...
and the
arbitrage pricing theory In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, it is widely beli ...
. A behavioral portfolio bears a strong resemblance to a pyramid with distinct layers. Each layer has well defined goals. The base layer is devised in a way that it is meant to prevent financial disaster, whereas, the upper layer is devised to attempt to maximize returns, an attempt to provide a shot at becoming rich. BPT is a descriptive theory based on the SP/A theory of Lola Lopes (1987), and closely related to Roy's safety-first criterion. The theory is described as a ''single account version'': BPT-SA, which is very closely related to the SP/A theory. In this multiple account version, investors can have fragmented portfolios, just as we observe among investors. They even propose in their initial article a Cobb–Douglas utility function that shows how money is allocated in the two mental accounts.

See also

Market sentiment Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including ...


Portfolio theories Behavioral finance