Shouldn't all eggs be putted in one basket? A portfolio model based on investor sentiment and inertial thinking

Jun Xie and Chunpeng Yang

Economic Modelling, 2013, vol. 35, issue C, 682-688

Abstract: In the portfolio choice literatures and the financial market, diversification and concentration are the focus of debate of philosophers. In this paper, we develop a model of portfolio choice to integrate the diversification strategy and the concentration strategy. Our model relies on the concepts of investor sentiment and inertial thinking. The results show that: Generally, when the level of sentiment is relatively low, an investor who is affected by sentiment and inertial thinking may do a well-diversified investment the same as the rational investor. When the level of sentiment is high enough, the investment strategies including diversification and concentration are complex and volatile. Quantitative results for either diversification or concentration investment are given for all cases in the paper.

Keywords: Investor sentiment; Inertial thinking; Investment portfolio; Behavioral finance (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:35:y:2013:i:c:p:682-688

DOI: 10.1016/j.econmod.2013.08.030

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