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Beyond Hope and Fear:Behavioral Portfolio Theory

In: Finance and the Behavioral Prospect

Author

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  • James Ming Chen

    (Michigan State University)

Abstract

This book and its companion volume, Postmodern Portfolio Theory,1 have devoted most of their attention to two models of finance. Each of these two models is sensitive to human behavior. Postmodern Portfolio Theory treated mathematical finance as a “pattern of timeless moments,” a deeply quantitative puzzle whose answer lies in statistical distributions and their properties. The presentation of a higher-moment CAPM in Chap. 3 of this book enables the overtly behavioral interpretation of moment-based theories of finance, which associate different statistical moments (mean, variance, skewness, and kurtosis) with different emotions.2 Other chapters in this book, so far, have presented financial models whose primary or even exclusive purpose is to describe economic behavior as undertaken by actual humans, as opposed to hypothetical economic reason dictated by quantitative logic. Prospect theory, in particular, reflects the “psychophysics of chances.”3

Suggested Citation

  • James Ming Chen, 2016. "Beyond Hope and Fear:Behavioral Portfolio Theory," Quantitative Perspectives on Behavioral Economics and Finance, in: Finance and the Behavioral Prospect, chapter 0, pages 247-281, Palgrave Macmillan.
    • Handle: RePEc:pal:qpochp:978-3-319-32711-2_10
    DOI: 10.1007/978-3-319-32711-2_10
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