Characteristics analysis of behavioural portfolio theory in the Markowitz portfolio theory framework

Abstract

Purpose

In recent times, behavioural models for asset allocation have been getting more attention due to their probabilistic modelling for scenario consideration. Many investors are thinking about the trade-offs and benefits of using behavioural models over conventional mean-variance models. In this study, the authors compare asset allocations generated by the behavioural portfolio theory (BPT) developed by Shefrin and Statman (2000) against the Markowitz (1952) mean-variance theory (MVT).

Design/methodology/approach

The data used have been culled from BRICS countries' major index constituents from 2009 to 2019. The authors consider a single period economy and generate future probable outcomes based on historical data in order to determine BPT optimal portfolios.

Findings

This study shows that a fair number of portfolios satisfy the first entry constraint of the BPT model. BPT optimal portfolio exhibits high risk and higher returns as compared to typical Markowitz optimal portfolio.

Originality/value

The BRICS countries' data were used because the dynamics of the emerging markets are significantly different from the developed markets, and many investors have been considering emerging markets as their new investment avenues.

Citation

Mittal, S., Bhattacharya, S. and Mandal, S. (2022), "Characteristics analysis of behavioural portfolio theory in the Markowitz portfolio theory framework", Managerial Finance, Vol. 48 No. 2, pp. 277-288. https://doi.org/10.1108/MF-05-2021-0208