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A Behavioral Approach to the Asset Allocation Puzzle

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Author Info
Siebenmorgen, Niklas () (Graduiertenkolleg Finanz-/Gütermärkte)
Weber, Martin () (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)
Abstract

This paper describes a study, in which we examine the diversification behavior of financial advisors. The Asset Allocation Puzzle describes the phenomenon that popular financial advice tends to be inconsistent with the mutual-fund separation theorem. While Canner, Mankiw and Weil (1997) try to explain the puzzle by relaxing the rigid assumptions of the CAPM, we follow another idea: Learning from Benartzi and Thaler (2000) about investors' naive diversification strategies, we find evidence that the Asset Allocation Puzzle can be explained by a new behavioral portfolio model. To verify these findings we distributed questionnaires among several investment consultants who gave us information about their market expectations and three asset allocation recommendations. Their recommendation strategies indeed seem to be reflected by the behavioral portfolio model. Finally, we examine losses of efficiency for their recommendations.

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Publisher Info
Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 00-46.

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Length: 44 pages
Date of creation: 18 Oct 2000
Date of revision:
Handle: RePEc:xrs:sfbmaa:00-46

Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Elton, Edwin J. & Gruber, Martin J., 2000. "The Rationality of Asset Allocation Recommendations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(01), pages 27-41, March. [Downloadable!]
  2. Kroll, Yoram & Levy, Haim & Rapoport, Amnon, 1988. "Experimental tests of the mean-variance model for portfolio selection," Organizational Behavior and Human Decision Processes, Elsevier, vol. 42(3), pages 388-410, December. [Downloadable!] (restricted)
  3. Niko Canner & N. Gregory Mankiw & David N. Weil, 1994. "An Asset Allocation Puzzle," NBER Working Papers 4857, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. 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)
  5. Weber, Martin & Camerer, Colin F., 1998. "The disposition effect in securities trading: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 167-184, January. [Downloadable!] (restricted)
  6. Siebenmorgen, Niklas & Weber, Elke U. & Weber, Martin, 2000. "Communicating Asset Risk: How the format of historic volatility information affects risk perception and investment decisions," Sonderforschungsbereich 504 Publications 00-38, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  7. Kroll, Yoram & Levy, Haim, 1992. "Further Tests of the Separation Theorem and the Capital Asset Pricing Model," American Economic Review, American Economic Association, vol. 82(3), pages 664-70, June. [Downloadable!] (restricted)
  8. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 127-151, June. [Downloadable!]
  9. Michael Brennan & Yihong Xia, 1998. "Resolution of a Financial Puzzle," University of California at Los Angeles, Anderson Graduate School of Management 1117, Anderson Graduate School of Management, UCLA. [Downloadable!]
  10. Kelly, Morgan, 1995. "All their eggs in one basket: Portfolio diversification of US households," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 87-96, June. [Downloadable!] (restricted)
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  1. Oussama Chakroun & Georges Dionne & Amélie Dugas-Sampara, 2006. "Empirical Evaluation of Investor Rationality in the Asset Allocation Puzzle," Cahiers de recherche 0635, CIRPEE. [Downloadable!]
  2. Siebenmorgen, Niklas & Weber, Elke U. & Weber, Martin, 2000. "Communicating Asset Risk: How the format of historic volatility information affects risk perception and investment decisions," Sonderforschungsbereich 504 Publications 00-38, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
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