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A Behavioral Approach to the Asset Allocation Puzzle

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  • Siebenmorgen, Niklas

    (Graduiertenkolleg Finanz-/Gütermärkte)

  • Weber, Martin

    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

Abstract

This paper describes a study, in which we examine the diversification behavior of financial advisors. The Asset Allocation Puzzle describes the phenomenon that popular financial advice tends to be inconsistent with the mutual-fund separation theorem. While Canner, Mankiw and Weil (1997) try to explain the puzzle by relaxing the rigid assumptions of the CAPM, we follow another idea: Learning from Benartzi and Thaler (2000) about investors' naive diversification strategies, we find evidence that the Asset Allocation Puzzle can be explained by a new behavioral portfolio model. To verify these findings we distributed questionnaires among several investment consultants who gave us information about their market expectations and three asset allocation recommendations. Their recommendation strategies indeed seem to be reflected by the behavioral portfolio model. Finally, we examine losses of efficiency for their recommendations.

Suggested Citation

  • Siebenmorgen, Niklas & Weber, Martin, 2000. "A Behavioral Approach to the Asset Allocation Puzzle," Sonderforschungsbereich 504 Publications 00-46, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:00-46
    Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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    Cited by:

    1. Langer, Thomas & Weber, Martin, 2000. "The impact of feedback frequency on risk taking : how general ist the phenomenon?," Papers 00-49, Sonderforschungsbreich 504.
    2. Siebenmorgen, Niklas & Weber, Elke U. & Weber, Martin, 2000. "Communicating asset risk : how the format of historic volatility information affects risk perception and investment decisions," Papers 00-38, Sonderforschungsbreich 504.
    3. Chakroun, Oussama & Dionne, Georges & Dugas-Sampara, Amélie, 2006. "Empirical evaluation of investor rationality in the asset allocation puzzle," Working Papers 06-11, HEC Montreal, Canada Research Chair in Risk Management.
    4. Elke U. Weber & Niklas Siebenmorgen & Martin Weber, 2005. "Communicating Asset Risk: How Name Recognition and the Format of Historic Volatility Information Affect Risk Perception and Investment Decisions," Risk Analysis, John Wiley & Sons, vol. 25(3), pages 597-609, June.

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