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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.)

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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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Paper provided by Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, 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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  25. Pierre-Guillaume Méon & Khalid Sekkat, 2006. "Institutional quality and trade: which institutions? which trade?," Working Papers DULBEA 06-06.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  26. Michel Beine & Pierre-Yves Preumont & Ariane Szafarz, 2006. "Sector diversification during crises: A European perspective," Working Papers DULBEA 06-07.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  27. Pierre-Guillaume Méon & Laurent Weill, 2005. "Can Mergers in Europe Help Banks Hedge Against Macroeconomic Risk?," Working Papers DULBEA 05-08.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  30. Thibault Biebuyck & Ariane Chapelle & Ariane Szafarz, 2002. "Les leviers de contrôle des actionnaires majoritaires," Working Papers CEB 03-001.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
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  1. Hassan Ayoub & Jérôme Creel & Etienne Farvaque, 2008. "Détermination du niveau des prix et finances: le cas du Liban, 1965-2005," Working Papers DULBEA 08-10.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
  2. Olivier Debande & Jean-Luc De Meulemeester, 2008. "Quality and variety competition in higher education," Working Papers DULBEA 08-12.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  3. Oscar Bernal & Kim Oosterlinck & Ariane Szafarz, 2009. "Observing bailout expectations during a total eclipse of the sun," Working Papers DULBEA 09-01.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  4. Jean-Luc De Meulemeester, 2007. "L'Economie de l'Education fait-elle des Progrès? Une Perspective d'Histoire de la Pensée Economique," Working Papers DULBEA 07-15.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  5. Pierre-Guillaume Méon & Friedrich Schneider & Laurent Weill, 2007. "Does taking the shadow economy into account matter to measure aggregate efficiency?," Working Papers DULBEA 07-18.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  6. Charles Plaigin, 2009. "Exploratory study on the presence of cultural and institutional growth spillovers," Working Papers DULBEA 09-03.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
  7. Henri Capron & Michele Cincera, 2007. "EU Pre-competitive and Near-the-Market S&T Collaborations," Working Papers DULBEA 07-17.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  8. Jérôme de Henau & Leila Maron & Danièle Meulders & Sîle O'Dorchai, 2007. "Travail et Maternité en Europe, COnditions de Travail et Politiques Publiques," Working Papers DULBEA 07-14.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  9. Henri Capron, 2007. "Politique de cohésion et développement régional," Working Papers DULBEA 07-16.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
  10. Ariane Szafarz, 2007. "Hiring People-like-Yourself: A Representation of Discrimination on the Job Market," Working Papers DULBEA 07-21.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  11. Benoît Mahy & François Rycx & Mélanie Volral, 2008. "L’influence de la dispersion salariale sur la performance des grandes entreprises belges," Working Papers DULBEA 08-13.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  12. Pierre-Guillaume Méon & Ariane Szafarz, 2008. "Labor market discrimination as an agency cost," Working Papers DULBEA 08-19.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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  13. Abdeslam Marfouk, 2008. "The African Brain Drain: Scope and Determinants," Working Papers DULBEA 08-07.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
  14. Sîle O'Dorchai, 2008. "Pay inequality in 25 European countries," Working Papers DULBEA 08-06.RS, Université libre de Bruxelles, Department of Applied Economics (DULBEA). [Downloadable!]
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