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Portfolio selection with mental accounts and delegation

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Author Info

  • Alexander, Gordon J.
  • Baptista, Alexandre M.

Abstract

Das et al. (2010) develop an elegant framework where an investor selects portfolios within mental accounts but ends up holding an aggregate portfolio on the mean-variance frontier. This investor directly allocates the wealth in each account among available assets. In practice, however, investors often delegate the task of allocating wealth among assets to portfolio managers who seek to beat certain benchmarks. Accordingly, we extend their framework to the case where the investor allocates the wealth in each account among portfolio managers. Our contribution is threefold. First, we provide an analytical characterization of the existence and composition of the optimal portfolios within accounts and the aggregate portfolio. Second, we present conditions under which such portfolios are not on the mean-variance frontier, and conditions under which they are. Third, we show that the aforementioned analytical characterization is also applicable within the framework of Das et al. and thus improves upon their numerical approach.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 10 (October)
Pages: 2637-2656

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:10:p:2637-2656

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Portfolio selection Mental accounts Delegation Benchmarking Behavioral finance;

References

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  1. Jonathan Ingersoll & Ivo Welch, 2007. "Portfolio Performance Manipulation and Manipulation-proof Performance Measures," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1503-1546, 2007 17.
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  4. Laibson, David I. & Madrian, Brigitte & Choi, James J., 2009. "Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect," Scholarly Articles 4686774, Harvard University Department of Economics.
  5. Alexander, Gordon J. & Baptista, Alexandre M., 2010. "Active portfolio management with benchmarking: A frontier based on alpha," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2185-2197, September.
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  17. Juan-Pedro Gómez & Tridib Sharma, 2003. "Portfolio delegation under short-selling constraints," Economics Working Papers 695, Department of Economics and Business, Universitat Pompeu Fabra.
  18. Jules H. van Binsbergen & Michael W. Brandt & Ralph S.J. Koijen, 2006. "Optimal Decentralized Investment Management," NBER Working Papers 12144, National Bureau of Economic Research, Inc.
  19. Admati, Anat R & Pfleiderer, Paul, 1997. "Does It All Add Up? Benchmarks and the Compensation of Active Portfolio Managers," The Journal of Business, University of Chicago Press, vol. 70(3), pages 323-50, July.
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  22. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  23. Baptista, Alexandre M., 2008. "Optimal delegated portfolio management with background risk," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 977-985, June.
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Citations

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Cited by:
  1. Baptista, Alexandre M., 2012. "Portfolio selection with mental accounts and background risk," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 968-980.
  2. Jiang, Chonghui & Ma, Yongkai & An, Yunbi, 2013. "International portfolio selection with exchange rate risk: A behavioural portfolio theory perspective," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 648-659.
  3. Chiarawongse, Anant & Kiatsupaibul, Seksan & Tirapat, Sunti & Roy, Benjamin Van, 2012. "Portfolio selection with qualitative input," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 489-496.

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