23. Behavioral Portfolio Theory and Investment Management

  1. H. Kent Baker and
  2. Victor Ricciardi
  1. Erick W. Rengifo1,
  2. Rossen Trendafilov2 and
  3. Emanuela Trifan3

Published Online: 1 MAR 2014

DOI: 10.1002/9781118813454.ch23

Investor Behavior: The Psychology of Financial Planning and Investing

Investor Behavior: The Psychology of Financial Planning and Investing

How to Cite

Rengifo, E. W., Trendafilov, R. and Trifan, E. (2014) Behavioral Portfolio Theory and Investment Management, in Investor Behavior: The Psychology of Financial Planning and Investing (eds H. K. Baker and V. Ricciardi), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118813454.ch23

Author Information

  1. 1

    Associate Professor of Economics, Fordham University

  2. 2

    Adjunct Professor of Economics, Fordham University and Iona College

  3. 3

    Quantitative Analyst, Bayerngas Energy

Publication History

  1. Published Online: 1 MAR 2014
  2. Published Print: 31 JAN 2014

ISBN Information

Print ISBN: 9781118492987

Online ISBN: 9781118813454

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Keywords:

  • behavioral asset pricing model;
  • behavioral portfolio theory;
  • loss aversion;
  • mental accounting;
  • prospect theory;
  • security-potential/aspiration theory

Summary

This chapter focuses on the attitude of investors toward financial gains and losses and their decisions on wealth allocation, and how these changes are subject to behavioral factors. The focal point is the integration of behavioral elements into the classic portfolio optimization. Individual perceptions are modeled according to four separate frameworks that build on each other: prospect theory, safety-first portfolio theory, security-potential/aspiration (SP/A) theory, and behavioral portfolio theory. SP/A theory evolves from safety-first portfolio theory and the introduction of aspiration level. The behavioral portfolio theory integrates the idea of mental accounts from prospect theory with the portfolio optimization framework of the SP/A theory and in this way it creates a unified model. The last part of the discussion addresses the behavioral asset pricing model (BAPM).