Focus on... The Individual Investor

Standard financial theory does not distinguish categories of investors, in terms of optimal portfolios or trading strategies. Obviously there is a gap between individual investors and mutual funds because the investment problem is quite different, due to constraints, market imperfections and behavioral biases. In this paper we focus on individual investor’s portfolios and trading behavior. We compare what is predicted by portfolio choice theory to what really happens on financial markets. We then develop some of the alternative theories explaining the behavior of individual investors.