Beyond Hope and Fear:Behavioral Portfolio Theory

James Ming Chen
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James Ming Chen: Michigan State University

Chapter Chapter 10 in Finance and the Behavioral Prospect, 2016, pp 247-281 from Palgrave Macmillan

Abstract: Abstract This book and its companion volume, Postmodern Portfolio Theory,1 have devoted most of their attention to two models of finance. Each of these two models is sensitive to human behavior. Postmodern Portfolio Theory treated mathematical finance as a “pattern of timeless moments,” a deeply quantitative puzzle whose answer lies in statistical distributions and their properties. The presentation of a higher-moment CAPM in Chap. 3 of this book enables the overtly behavioral interpretation of moment-based theories of finance, which associate different statistical moments (mean, variance, skewness, and kurtosis) with different emotions.2 Other chapters in this book, so far, have presented financial models whose primary or even exclusive purpose is to describe economic behavior as undertaken by actual humans, as opposed to hypothetical economic reason dictated by quantitative logic. Prospect theory, in particular, reflects the “psychophysics of chances.”3

Keywords: Risk Aversion; Supra Note; Portfolio Selection; Prospect Theory; Aspiration Level (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:pal:qpochp:978-3-319-32711-2_10

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DOI: 10.1007/978-3-319-32711-2_10

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