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Behavioral finance and its implication in the use of the black-litterman model
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.).
2012 (English)In: Journal of Real Estate Portfolio Management, ISSN 1083-5547, Vol. 18, no 1, 99-121 p.Article in journal (Refereed) Published
Abstract [en]

This article discusses the behavioral implications of the Black-Litterman model. In behavioral finance, the utility function of the investor is reference-based, and investors estimate losses and gains in relation to this benchmark. Implications drawn from past research within the field indicate and explain why the portfolio output given by the Black-Litterman model appears more intuitive to fund managers than portfolios generated by the Markowitz model. Another feature of the Black-Litterman model is that the user assigns levels of confidence associated with each asset view in the form of confidence intervals. People are overconfident in financial decision-making, particularly when stating confidence intervals, which is particularly problematic for this model. Hence implications from research regarding overconfidence do not favor the use of confidence levels when weighting portfolios.

Place, publisher, year, edition, pages
2012. Vol. 18, no 1, 99-121 p.
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:kth:diva-107829Scopus ID: 2-s2.0-84869122891OAI: oai:DiVA.org:kth-107829DiVA: diva2:578175
Note

QC 20121218

Available from: 2012-12-17 Created: 2012-12-17 Last updated: 2012-12-17Bibliographically approved

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