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Weighting Function in the Behavioral Portfolio Theory

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Author Info
Olga Bourachnikova () (LaRGE (Laboratoire de Recherche en Gestion et en Economie),FSEG, ULP, Université de Strasbourg I, Pôle Européen de Gestion et d’Economie.)
Abstract

The Behavioral Portfolio Theory (BTP) developed by Shefrin and Statman (2000) considers a probability weighting function rather than the real probability distribution used in Markowitz’s Portfolio Theory (1952). The optimal portfolio of a BTP investor, which consists in a combination of bonds and lottery ticket, can differ from the perfectly diversified portfolio of Markowitz. We found that this particular form of portfolio is not due to the weighting function. In this article we explore the implication of weighting function in the portfolio construction. We prove that the expected wealth criteria (used by Shefrin and Statman), even if the objective probabilities were deformed, is not a sufficient condition for obtaining significantly different forms of portfolio. Not only probabilities but also future outcomes have to be transformed.

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File URL: http://www.solvay.edu/EN/Research/Bernheim/documents/wp07011.pdf
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File Function: First version, 2007
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Paper provided by Université Libre de Bruxelles, Solvay Business School, Centre Emile Bernheim (CEB) in its series Working Papers CEB with number 07-011.RS.

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Length: 26 pages
Date of creation: Mar 2007
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Handle: RePEc:sol:wpaper:07-011

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G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  1. Mauro Guillén & Adrian Tschoegl, 2002. "Banking on Gambling: Banks and Lottery-Linked Deposit Accounts," Journal of Financial Services Research, Springer, vol. 21(3), pages 219-231, June. [Downloadable!] (restricted)
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  2. Kroll, Yoram & Levy, Haim & Rapoport, Amnon, 1988. "Experimental Tests of the Separation Theorem and the Capital Asset Pricing Model," American Economic Review, American Economic Association, vol. 78(3), pages 500-519, June. [Downloadable!] (restricted)
  3. Arzac, Enrique R. & Bawa, Vijay S., 1977. "Portfolio choice and equilibrium in capital markets with safety-first investors," Journal of Financial Economics, Elsevier, vol. 4(3), pages 277-288, May. [Downloadable!] (restricted)
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