Shouldn't all eggs be putted in one basket? A portfolio model based on investor sentiment and inertial thinking

a r t i c l e i n f o In the portfolio choice literatures and the financial market, diversification and concentration are the focus of debate of philosophers. In this paper, we develop a model of portfolio choice to integrate the diversification strategy and the concentration strategy. Our model relies on the concepts of investor sentiment and inertial thinking. The results show that: Generally, when the level of sentiment is relatively low, an investor who is affected by sentiment and inertial thinking may do a well-diversified investment the same as the rational investor. When the level of sentiment is high enough, the investment strategies including diversification and concentration are complex and volatile. Quantitative results for either diversification or concentration investment are given for all cases in the paper. Shouldn't investor put all his (her) eggs in one basket? According to this question, there are two contrasting answers concerning the process of portfolio selection: Consent and contra. In fact, this is the debate about diversification and concentration in the field of portfolio choice. On the one hand, investment diversification almost has been accepted as one of the most fundamental tenets of modern financial economics since Markowitz posed the mean-variance framework. Markowitz (1952) argues that an investor should diversify across a large number of stocks, and it is inefficient to put a large holding in just a few stocks. support investment diversification by the analysis of standard financial theory which assumes that the investor is rational. Taking into account that the impact of standard financial theory is so strong, we assume that the investor should give priority to rational investment strategy. On the other hand, because of the lack of an analytical characterization , the academic literature has so far paid relatively little attention to concentration investment. There are few theories and models that can describe the concentrated investment. But, in the finance market, lack of diversification has been confirmed by a number of empirical researches. Blume and Friend (1975) find that the average number of stocks in the investor portfolio is only 3. also show that there are a very small number of stocks in the majority of investor's portfolio. Sporadic interpretations of concentrated investment are due to the overconfidence The paper is not against one of the investment strategies: Diversification and concentration. Our goal in the paper is to construct a bridge that contracts diversification with concentration. Boyle …