7. Building Your Portfolio the Behavioral Economics Way

“My image of how people form portfolios is they walk down the aisles of the financial supermarket, picking up some cereal (buying one company’s stock), sardines (buying another stock), adding in some cheese or whatever tempts them, and once the cart is full proceed to check out. That becomes their portfolio.” Meir Statman, a finance Professor at Santa Clara University, offers this harsh view of portfolio construction and securities selection. An early proponent of behavioral finance, Statman strongly believes we choose investments during a mindless walk, though not a random one, with little reflection about how everything fits together in our overall portfolio.

Ample empirical evidence ...

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