0 evaluări0% au considerat acest document util (0 voturi)
239 vizualizări13 pagini
Behavioral portfolio theory proposes that investors divide their money into mental account layers corresponding to different goals, and view each layer separately rather than their portfolio as a whole. A key feature is that risk attitudes vary across these mental account layers. The theory also emphasizes how behavioral preferences like aspirations, hope, and fear influence portfolio choices and returns. Investors may pursue multiple objectives like retirement security and wealth, and have different risk tolerances based on their goals and preferences.
Behavioral portfolio theory proposes that investors divide their money into mental account layers corresponding to different goals, and view each layer separately rather than their portfolio as a whole. A key feature is that risk attitudes vary across these mental account layers. The theory also emphasizes how behavioral preferences like aspirations, hope, and fear influence portfolio choices and returns. Investors may pursue multiple objectives like retirement security and wealth, and have different risk tolerances based on their goals and preferences.
Behavioral portfolio theory proposes that investors divide their money into mental account layers corresponding to different goals, and view each layer separately rather than their portfolio as a whole. A key feature is that risk attitudes vary across these mental account layers. The theory also emphasizes how behavioral preferences like aspirations, hope, and fear influence portfolio choices and returns. Investors may pursue multiple objectives like retirement security and wealth, and have different risk tolerances based on their goals and preferences.
Behavioral portfolio theory, introduced by Shefrin and Statman (2000), is a goal
based theory. In that theory, investors divide their money into many mental account layers of a portfolio pyramid corresponding to goals such as having a secure retirement, paying for a college education, or being rich enough to hop on a cruise ship whenever they please.
A central feature in behavioral portfolio theory is the observation that investors view their portfolios not as a whole, as prescribed by mean-variance portfolio theory, but as distinct mental account layers in a pyramid of assets, where mental account layers are associated with particular goals and where attitudes toward risk vary across layers.
Behavioral Portfolio Theory
BPT emphasizes the role of behavioral preferences in portfolio selection and proposes that individual investors portfolio choices and consequently return performance reflect characteristics such as aspirations, hope, fear, and narrow framing. In this respect, BPT helps to explain why some investors simultaneously buy bonds and lottery tickets by investigating multiple objectives (e.g., protection from poverty at retirement and potential for a shot at riches) as well as aspirations (Statman, 2002).we contribute to the literature in several ways. We (1) characterize some of the key ways in which individual investors differ from each other in terms of both preferences and beliefs, (2) develop a stylized dynamic behavioral portfolio selection model to explain how differences in preferences and beliefs lead to differences in investors portfolio decisions, (3) develop a series of hypotheses based on predictions stemming from the model, and (4) present a series of empirical findings, some of which serve to test our hypotheses, and some of which strike us as surprising and at odds with conventional wisdom. Our most striking result is that overtrading does not necessarily result in underperformance. Rather, underperformance depends on the circumstances. Investors with strong beliefs that stem from using fundamental analysis trade more frequently but still outperform investors using other strategies.
C. Beliefs: Biases, Framing and Probability Weighting The behavioral approach emphasizes the importance of both preferences and beliefs. In shifting the emphasis from preferences to beliefs, we identify three key issues. First, investors typically have erroneous beliefs stemming from behavioral biases. Examples of biases are excessive optimism and overconfidence. Excessive optimism can lead investors to overestimate expected returns (De Bondt and Thaler, 1985), whereas overconfidence can lead them to underestimate risk (Barber and Odean, 2000; Odean, 1998). In conjunction, this can lead to forecasts which are too bold (cf. Kahneman and Lovallo, 1993).
Second, because of framing effects, behavioral investors ignore information relating to return covariance. Instead, we follow the approach of prospect theory with narrow framing and assume that investors beliefs consist of marginal distributions for each security, which are applied to (2) on a security by security basis. In particular, investors are assumed to ignore covariance when choosing their portfolios.
Investors preferences & strategys: First, compare investors who rely on fundamental analysis as a strategy with those who rely on technical analysis. Investors using fundamental analysis examine all underlying conditions relevant for future stock price developments. Besides financial statements, these include economic, demographic, and geopolitical factors. In contrast, investors relying on technical analysis only study the stock price movements themselves, believing that historical data provides indicators for future stock price developments. To us, this suggests that fundamental analysis typically involves more information than technical analysis (cf. Shleifer and Summers, 1990). Investors relying on fundamental analysis are therefore more likely to become more familiar with the firms they follow than investors relying on technical analysis.
Hypothesis H1: Relative to investors relying on technical analysis, investors relying on fundamental analysis will form bolder beliefs, and their greater overconfidence will induce them to trade more frequently.
Apart from a very small segment of highly skilled investors who hold concentrated portfolios (Barber, Lee, Liu, and Odean, 2009; Goetzmann and Kumar, 2008), overtrading typically leads to underperformance due to the accumulation of transaction costs (Barber and Odean, 2000). As there is no a priori reason to expect that investors using fundamental analysis are more skilled than investors using other strategies, we expect:
H2: Relative to investors relying on technical analysis, investors relying on fundamental analysis will earn lower risk and style adjusted returns. Second, compare investors who rely on fundamental analysis with those relying on their intuition. In the behavioral framework, investors do not place high intrinsic value on diversification. In the spirit of prospect theorys isolation effect (mental accounting, narrow framing) (Kahneman and Tversky, 1979), investors act as if they implement condition (2) on a security-by-security basis, rather than as part of an integrated optimization.10 As a result, status quo bias will typically lead to underdiversification. Ceteris paribus, (2) implies that investors holding more securities will tend to be those with stronger convictions in their stock picking skills and in possession of better and more information which leads them to make bolder forecasts (Kahneman and Lovallo, 1993). Only in these cases, will investors be able to overcome status quo bias and be willing to invest in multiple stocks and thus make less timid choices. Investors Objective: H3: Investors relying on fundamental analysis will hold a larger number of different stocks in their portfolio than investors relying on intuition. Investment objectives are imbedded in investors preferences. Aspiration levels constitute an important component of objectives. A key implication of behavioral portfolio theory is that investors whose goals involve high aspirations act as if they have a high tolerance for risk, implying that investors, who set high aspiration levels in combination with an associated high probability of achieving those levels, will tend to choose risky portfolios (Shefrin and Statman, 2000). Risky portfolios are portfolios that are more exposed to market risk and overweight small firms (Barber and Odean, 2001). Hence we hypothesize:
H4: Investors with higher aspiration levels have higher risk profiles than investors with lower aspiration levels.
H5: Investors with higher risk profiles will hold riskier portfolios (i.e. with higher exposure to the market and small-firm factors) than investors with lower risk profiles.
As previously discussed, because of familiarity bias, investors who rely on fundamental analysis are likely to have high conviction in their stock picking skills. In addition to leading them to make bold forecasts, we suggest that familiarity also leads them to be more ambitious than investor whose beliefs feature more ambiguity. This is because ambiguity involves uncertainty about P(A), the probability of achieving the aspiration level. In turn, ambiguity aversion induces pessimism about P(A), which results in less risk taking. This leads to the following hypothesis:
H6: Investors relying on fundamental analysis will have the highest aspirations and risk profiles.
The behavioral framework links investments objectives to trading behavior. In this regard, investors saving for retirement or building a financial buffer and investors who invest to speculate or exercise a hobby lie at opposite ends of a continuum. For investors who mainly invest as a hobby or to speculate, the second and third term in (2) loom large, as these relate to the benefits from (anticipated) evaluation utility (Barberis and Xiong, 2008) and thrill seeking (Grinblatt and Keloharju, 2006). To experience these positive emotions such investors will trade more frequently than other investors. Hence we hypothesize:
H7: Investors who invest primarily as a hobby or to speculate will trade more frequently than investors whose primary investment objective is to build a financial buffer or save for retirement.
Additionally, investors who mainly invest as a hobby or to speculate might have very high conviction, make bold forecasts, tolerate risk, and set ambitious targets. Indeed, recent literature shows that investors who trade to entertain themselves (Dorn and Sengmueller, 2009) or to speculate essentially seeing stocks as a lottery ticket providing a shot at riches (Statman, 2002) have higher aspirations and take more risk relative to investors who do not associate investing with gambling (Kumar, 2009). In contrast, investors whose primary investment objective is to build a financial buffer or save for retirement are likely to have lower aspirations and choose more conservative portfolios. In short:
H8: Investors whose primary investment objective is to build a financial buffer or save for retirement have lower aspirations and take less risk than investors who invest primarily as a hobby or to speculate.
Examples Prospect theory: If there are two circumstances firstly, Investor gains $50 on investment of equal amount and secondly Investor gains $100 dollars on investment of $50 but suffer a loss of $50 latter. In both the cases the overall gains are $50 however most of the investor prefers the first option. Regret theory: If investor decides to choose the investment destination which has bad image and his decision goes against his desired result than it is harder to rationalize. Anchoring theory: If the share price of ABC Corporation is rising than investor may try to link its price movement with its past performance. And the basic fundamentals may become more irrelevance in the emergence of the new trends.
Investors often do not participate in all asset and security classes: As per Kent et al. (2001), investors incline to emphasis only in stocks that are on their radar screens. Investor might choose from the assets class which they are more familiar with and neglects the assets like bond, equity, commodities. Investors use historical data as an indicator of future movement in stock purchase decisions: Often it is found that the investor try to judge the future price movement in stock price based on past performance which can be termed as technical analysis. This advocates that investors will on occasion infer past price trends naively. Investors trade too aggressively: Kent et al. (2001) found that investors are overconfident in their decision making process. And due to this overconfidence they dont emphasize on information and action of others and they are also believed to overreact to unreliable information than to reliable information. According to the findings of Barber and Odean(1999). Investor who has an experience of greatest success in past in trading will trade more in the future. This evidence is consistent with self-attributing bias which means investor has largely attributed their success to their skill rather than luck.
Investors are influenced by historical high or low trading stocks: Daniel, Hirshleifer, Teoh (2002) suggested that investors may form theories or concept of market functionality based on unrelated historical prices, somewhat similar to making choices built upon mental accounting with respect to arbitrary reference points. Tvernsky and Karneman (1974) also relate the idea of anchoring, where investors set a primary value for future price. Investors behave parallel to other investor: This occurrence is called herding, where investors is consistent with the rational response to any new information coming into the market. Kent et al. (2001), says people tends to behave in similar or a parallel way with one another, irrespective of whether the choices are smart enough or not. Investor depending on fundamental analysis tends to hold larger numbers of stocks in their portfolio: Fundamental analysis studies all underlying condition of firms future prospects which maybe internal or external. Shleifer and Summers. (1990), says that investor relying on fundamentals are likely to be familiar to firm they follow than technical analysis and as a result investor may find different alternatives backed by strong beliefs and diversify their portfolio.
Investors exhibit loss-averse Behavior: In the study of Odean (1998), he showed that investor are more likely to sell stocks which are making profits and they hesitate to sell stocks which are making losses. According to Tversky and Kahneman, (1991), this psychological tendency explains the disposition effect; even various studies on investor behavior have found that investors are more inclined to realizing gains than losses. Trading as entertainment: Recent literature has revealed that some investor do trading as it hobby and to entertain themselves (Dorn and Sengmueller, 2009) or speculate on certain stock seeing them as a lottery ticket which can make them rich in one shot (statman, 2002). These types of investors have a high convection and a very ambitious target to achieve with high degree of risk tolerance. In contrast investors whose objective is to plan for retirement and financial buffer are more likely to have lower aspiration and their portfolio are likely to be conservative.
References for above three pages: Daniel, K., Hirshleifer, D., & Teoh, S. H. (2002). Investor psychology in capital markets: Evidence and policy implications. Journal of Monetary Economics,49(1), 139-209.
Daniel, K. D., Hirshleifer, D., & Subrahmanyam, A. (2001). Overconfidence, arbitrage, and equilibrium asset pricing. The Journal of Finance, 56(3), 921-965.
Odean, T. (1998). Volume, volatility, price, and profit when all traders are above average. The Journal of Finance, 53(6), 1887-1934.
Hirshleifer, D. (2001). Investor psychology and asset pricing. The Journal of Finance, 56(4), 1533-1597.
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. science, 185(4157), 1124-1131.
Shleifer, A., & Summers, L. H. (1990). The noise trader approach to finance.Journal of Economic perspectives, 4(2), 19-33.
Dorn, D., & Sengmueller, P. (2009). Trading as entertainment?. Management Science, 55(4), 591-603.
Other References: Hoffmann, A. O., Shefrin, H., & Pennings, J. (2010). Behavioral portfolio analysis of individual investors. June, 24, 2010.
Ferri, R. A. (2010). The Power of Passive Investing: More Wealth with Less Work. John Wiley & Sons.
Chong, J., & Phillips, G. M. (2013). Portfolio Size Revisited. The Journal of Wealth Management, 15(4), 49-60.
Alexeev, V., & Tapon, F. (2013). Equity Portfolio Diversification: How Many Stocks are Enough? Evidence from Five Developed Markets.
Statman, M. (2008). What Is Behavioral Finance?. Handbook of Finance.