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The proliferation of funds as well as fund styles seems to be inconsistent with standard rationality assumptions. If standard portfolio theory, based on those assumptions, holds, then retail investors should hold large diversified portfolios together with investments in non-risky assets. Risk aversion should exclusively determine the amount of non-risky investments compared to the risky diversified fund. It is well-know that this is not what is empirically observed, a phenomenon called the asset allocation puzzle. Over the last two decades, standard rationality assumptions have been questioned by the behavioral economic sand finance literature. This has led to Behavioral Portfolio theory, even though the applications are quite meagre. The potential “irrationalities” open the door to...
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