Somatic portfolio theory: when emotions lead to economic efficiency

This paper offers a theoretical generalization of the mean-variance theory (MVT) by integrating the ’expected returns/risk’ rule with variables that measure emotions. We validate its accuracy using a psycho-physiological experiment with a sample of 645 individuals who were asked to take portfolio decisions in a laboratory setting. Results show that MVT frequently fails to describe investor behavior. We obtain evidence that individuals actually take efficient portfolio choices, but only when emotions are added to the equation. This paper shows that by merging theories of rational choice and evidence of emotions, the authentic human decision process can be described and predicted.