Behavioral Asset Allocation for Foundations and Endowments

Abstract

The behavioral asset allocation framework developed for individual investors can help foundation and endowment trustees become more comfortable with "uncomfortable" asset classes that would help overall portfolio efficiency. Eleemosynary investment, particularly at smaller charities, is typified by convention and conservatism. The behavioral asset allocation approach helps overcome this tendency by decomposing the total portfolio into timeline-based subportfolios that look to secure the nonprofit's payouts for many years and isolates the "uncomfortable" assets in the longest-term subportfolios. We advance and apply the behavioral asset allocation framework in a new context, yet one relevant for high-net-worth individuals with charitable intent.

Keywords: behavioral finance, portfolio choice, asset allocation, nonprofit, endowment, foundation, mean-variance optimization

JEL Classification: G11, G23, L30