Behavioral Portfolio Management

Behavioral Finance Understanding Improves Portfolio Performance

Behavioral finance is the study of how psychology affects financial decision making and financial markets. It is based on two principles:

  1. Markets are not fully efficient
  2. Investors are not totally rational

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According to Modern Portfolio & Efficient Market Theories;

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Benjamin Graham

Problem: Emotional Crowds

  • Irrational / Emotional financial decisions => Cognitive errors & Price distortions
  • Lack of big data analysis for capital markets and algorithmic trade
  • The hegemony of banks due to their capital structure and distribution channels

Conclusion: Leaving Money on the Table

 

“Investing isn’t about beating others at their game. It’s about controlling

yourself at your own game.”

Jason Zweig


Behavioral Portfolio Management seeks to remove emotions from investing. When emotions are removed, investors are better able to harness price distortions and mitigate cognitive errors by

  • Using behavioral factors to build portfolios with higher rate of return
  • Systematically looking for persistent behavioral factors by analyzing different datasets
  • Pioneering a completely new way to view portfolio management

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” 

Warren Buffet

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

George Soros

Put Your Money Where Your Mouth Is

“The individual investor should act consistently as an investor and not as a speculator.”

Benjamin Graham

Portfolio Prospectus

“Price is what you pay. Value is what you get.”

“The stock market is a device for transferring money from the impatient to the patient.”

Warren Buffett

“The stock market is filled with individuals who know the price of everything, but the value of nothing.”

Phillip Fisher