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Behavioral finance in financial market theory, utility theory, portfolio theory and the necessary statistics: A review

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  • Nawrocki, David
  • Viole, Fred

Abstract

We present an overview of behavioral finance’s consistent role in portfolio theory and market theory through utility theory. Since Bernoulli, the subjective nature of utility has been increasingly generalized for questionable purposes. Behavioral finance is reverting back to the original intents of utility theory. We also examine the statistical methods used to determine their suitability for the task at hand. Given the heterogeneous population at the market and individual security level, we suggest that nonparametric nonlinear statistics are best suited for descriptive and inferential analysis of all possible investor preferences.

Suggested Citation

  • Nawrocki, David & Viole, Fred, 2014. "Behavioral finance in financial market theory, utility theory, portfolio theory and the necessary statistics: A review," Journal of Behavioral and Experimental Finance, Elsevier, vol. 2(C), pages 10-17.
    • Handle: RePEc:eee:beexfi:v:2:y:2014:i:c:p:10-17
    DOI: 10.1016/j.jbef.2014.02.005
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    Cited by:

    1. Ligita Gasparėnienė & Rita Remeikienė & Aleksejus Sosidko & Vigita Vėbraitė & Evaldas Raistenskis, 2020. "Modeling of EURO STOXX 50 index price returns based on industrial production surprises: basic and machine learning approach," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(2), pages 1305-1320, December.
    2. Alda, Mercedes, 2017. "The relationship between pension funds and the stock market: Does the aging population of Europe affect it?," International Review of Financial Analysis, Elsevier, vol. 49(C), pages 83-97.
    3. Dipankar Mondal & N. Selvaraju, 2020. "Upside Beta Ratio: A Performance Measure For Potential-Seeking Investors," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(02), pages 1-26, April.
    4. Huang, Mengqi & Peng, Changhong & DU, Zhengyu & Liu, Yu, 2024. "A power regulation strategy for heat pipe cooled reactors based on deep learning and hybrid data-driven optimization algorithm," Energy, Elsevier, vol. 289(C).
    5. Brzeszczyński, Janusz & Gajdka, Jerzy & Kutan, Ali M., 2015. "Investor response to public news, sentiment and institutional trading in emerging markets: A review," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 338-352.
    6. Kumar, Satish & Rao, Sandeep & Goyal, Kirti & Goyal, Nisha, 2022. "Journal of Behavioral and Experimental Finance: A bibliometric overview," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    7. Philip A. Horvath & Amit K. Sinha, 2017. "Asymmetric reaction is rational behavior," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(1), pages 160-179, January.
    8. Trejos, Cristian & van Deemen, Adrian & Rodríguez, Yeny E. & Gómez, Juan M., 2019. "Overconfidence and disposition effect in the stock market: A micro world based setting," Journal of Behavioral and Experimental Finance, Elsevier, vol. 21(C), pages 61-69.
    9. Arie Harel & Jack Clark Francis & Giora Harpaz, 2018. "Alternative utility functions: review, analysis and comparison," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 785-811, October.
    10. Jasman Tuyon & Zamri Ahmada, 2016. "Behavioural finance perspectives on Malaysian stock market efficiency," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 16(1), pages 43-61, March.
    11. Arumugam, Devika & Krishna Prasanna, P., 2021. "Commonality and contrarian trading among algorithmic traders," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    12. Jasman Tuyon & Zamri Ahmad, 2018. "Behavioural Asset Pricing Determinants in a Factor and Style Investing Framework," Capital Markets Review, Malaysian Finance Association, vol. 26(2), pages 32-52.
    13. Jasman Tuyon & Zamri Ahmad, 2021. "Dynamic risk attributes in Malaysia stock markets: Behavioural finance insights," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5793-5814, October.

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