Wharton Pension Research Council Working Papers
 

Title

Behavioral Portfolios: Hope for Riches and Protection from Poverty

Document Type

Working Paper

Date of this Version

1-1-2003

Abstract

Behavioral portfolio theory is a useful description of the behavior of investors and a basis for good prescriptions. In particular, this theory posits that investors construct their portfolios as layered pyramids, where the bottom layers are designed for downside protection, while top layers are designed for upside potential. Risk-aversion gives way to risk-seeking at the uppermost layers as need to avoid poverty give way to hope for riches. Some investors fill the uppermost layers with the few stocks of an undiversified portfolio while others fill them with lottery tickets. We might lament the fact that people are attracted to lotteries, or we might accept it and help people strike a balance between hope for riches and protection from poverty. This challenge faces governments that offer to their citizens both Social Security and lotteries, corporations that offer their employees both mutual funds and company stocks, and a financial services industry that offers its investors both bond funds and Internet stocks.

Comments

The published version of this Working Paper may be found in the 2004 publication: Pension Design and Structure: New Lessons from Behavioral Finance.

Working Paper Number

WP2003-09

Copyright/Permission Statement

©2003 Pension Research Council of the Wharton School of the University of Pennsylvania. All Rights Reserved

Share

COinS
 

Date Posted: 04 September 2019