Abstract
This article discusses the behavioral implications of the Black-Litterman model. In behavioral finance, the utility function of the investor is reference-based, and investors estimate losses and gains in relation to this benchmark. Implications drawn from past research within the field indicate and explain why the portfolio output given by the Black-Litterman model appears more intuitive to fund managers than portfolios generated by the Markowitz model. Another feature of the Black-Litterman model is that the user assigns levels of confidence associated with each asset view in the form of confidence intervals. People are overconfident in financial decision-making, particularly when stating confidence intervals, which is particularly problematic for this model. Hence implications from research regarding overconfidence do not favor the use of confidence levels when weighting portfolios.
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