Title: Modern Portfolio Theory Vs. Behavioral Finance
Headings: Modern Portfolio Theory vs. Behavioral Finance
Modern Portfolio Theory vs. Behavioral Finance
Key Takeaways
Modern Portfolio Theory
Enter Behavioral Finance
Market Efficiency
Knowledge Distribution
Rational Investment Decisions
The Bottom Line

Content: Similarly, nobody would buy securities when the price was high and then panic and sell when the price drops. Theory aside, we all know that speculation takes place and that bubbles develop and pop. Furthermore, decades of research from organizations such as Dalbar, with its Quantitative Analysis of Investor Behavior study, show that irrational behavior plays a big role and costs investors dearly. The Bottom Line
While it is important to study the theories of efficiency and review the empirical studies that lend them credibility, in reality, markets are full of inefficiencies. One reason for the inefficiencies is that every investor has a unique investment style and way of evaluating an investment. One may use technical strategies while others rely on fundamentals, and still others may resort to using a dartboard. Many other factors influence the price of investments, ranging from emotional attachment, rumors and the price of the security to good old supply and demand. Clearly, not all market participants are sophisticated, informed and act only on available information. But understanding what the experts expect— and how other market participants may act—will help you make good investment decisions for your portfolio and prepare you for the market’s reaction when others make their decisions. Knowing that markets will fall for unexpected reasons and rise suddenly in response to unusual activity can prepare you to ride out the volatility without making trades you will later regret.