A Behavioral Finance Approach to Strategic Asset Allocation: A Case Study
9 Pages Posted: 5 Nov 2010
Date Written: Winter 2005-2006
Abstract
The focus placed on behavioral finance to help individual investors select a more appropriate - and more sustainable - strategic asset allocation has increased sharply in recent years. In many ways, this sudden focus may appear odd, because behavioral finance as a discipline has been around for some time. Early pioneers such as Kahneman and Tversky (1979) have been joined by a number of other eminent thinkers, including Shefrin and Statman (1985), Statman (1999), Shefrin (2000), and Statman (2002), and the literature has grown exponentially.
Brunel (2003) offered one of the initial formal suggestions, based on the work of these pioneers, linking behavioral finance and strategic asset allocation, in particular expanding upon Statman’s behavioral finance portfolio. Nevins (2004) took these recommendations further by providing specific insights into the way the mathematics of modern portfolio theory can be combined with thought processes sourced in the behavioral finance literature.
In this article, we expand on Brunel (2003) with a case study that identifies one weakness of the original process. We start with a brief summary of the findings and recommendations found in Brunel (2003), then discuss its principal weakness, suggest an alternative approach, and bring that alternative approach to life with the case study.
Keywords: Behavioral Finance, Strategic Asset Allocation
JEL Classification: G10, G11
Suggested Citation: Suggested Citation