Abstract
Behavioral finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets. In this paper, concepts of behavioral finance are surveyed and then the portfolio selection model in framework of behavioral finance theories is presented and compared with the Mean-Variance rational pattern. Historical data of TEDPIX for 10 years has been used and separated to 2 parts of test and evaluation groups. The optimum weight for risky asset proposed by standard mean-variance and behavioral model based on returns for the first 7 years (test data) in the 3 months periods. After that, returns of 84 optimum portfolios in a three year evaluation period are calculated. Mean test (CL=95%) shows that in Tehran Stock Exchange, the research hypothesis return of behavioral model is greater than return of standard mean-variance model, was rejected. Key words: Behavioral finance, investment portfolio, mental accounting, asymmetric risk preference, loss aversion.
Highlights
In standard portfolio selection model, optimal values are determined regarding risk tolerance, investment limits, financial goals and mean-variance optimization pattern
The optimum weight for risky asset proposed by standard mean-variance and behavioral model based on returns for the first 7 years in the 3 months periods
To evaluate Standard and Behavioral portfolio models, return and risk of 7 optimal risky asset, calculated through first period based on 28 periods of test data, 12 optimall portfolio weights was calculated based on 3 year evaluation data
Summary
In standard portfolio selection model, optimal values are determined regarding risk tolerance, investment limits, financial goals and mean-variance optimization pattern. This paper surveys the hypothesis and frameworks of behavioral finance theories and represents a portfolio selection model based on behavioral finance assumptions. Modern portfolio theory evaluates return and risk of risky assets, using mean-variance pattern; and represents a normative pattern for portfolio selection This theory assumes economic equilibrium, was the basis for other financial theories like capital assets pricing model (CAPM)developed by Sharp, Lintner and Mossine, and. This paper attempts to explain irrational factors which affect investment decisions and portfolio selection in financial market of Iran and presents a behavioral model based on frameworks of behavioral finance. This model is evaluated and compared with rational portfolio selection models
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