This chapter argues that the behavioural portfolio theory offers a good description of investor behaviour and a basis for good policy prescriptions. The theory states that investors view with portfolios not as a whole, but as distinct layers in a pyramid of assets where layers are associated with specific goals, and where attitudes towards risk vary across layers. Unlike the mean-variance theory which offers portfolio descriptions that investors do not follow, the behavioural portfolio theory offers prescription of pyramid portfolios that are closer to reality.
Keywords: behavioural portfolio theory; investor behaviour; investment; mean-variance portfolio theory; public policy
Chapter. 4830 words. Illustrated.
Subjects: Financial Markets
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