A Behavioral Approach to the Asset Allocation Puzzle

Niklas Siebenmorgen () and Martin Weber ()
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Niklas Siebenmorgen: Graduiertenkolleg Finanz-/Gütermärkte, Postal: L 13, 15, D-68131 Mannheim
Martin Weber: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre, Postal: L 5, 2, D-68131 Mannheim

No 00-46, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim

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.

New Economics Papers: this item is included in nep-evo and nep-fin
Date: 2000-10-18
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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