NBER Working Papers and Publications
|August 2018||Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field|
with Stephen G. Dimmock, Roy Kouwenberg, Olivia S. Mitchell: w24928
We explore the relation between probability weighting and household portfolio underdiversification in a representative household survey, using custom-designed incentivized lotteries. On average, people display Inverse-S shaped probability weighting, overweighting the small probabilities of tail events. As theory predicts, our Inverse-S measure is positively associated with portfolio underdiversification, which results in significant Sharpe ratio losses. We match respondents’ individual stock holdings to CRSP data and find that people with higher Inverse-S tend to pick stocks with positive skewness and hold positively-skewed equity portfolios. We show that these choices reflect preferences rather than probability unsophistication or limited financial knowledge.
|January 2013||Ambiguity Aversion and Household Portfolio Choice: Empirical Evidence|
with Stephen G. Dimmock, Roy Kouwenberg, Olivia S. Mitchell: w18743
We test the relation between ambiguity aversion and five household portfolio choice puzzles: non- participation, low allocations to equity, home-bias, own-company stock ownership, and portfolio under- diversification. In a representative U.S. household survey, we measure ambiguity aversion using custom- designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market participation, the fraction of financial assets in stocks, and foreign stock ownership, but positively related to own-company stock ownership. Conditional on stock ownership, ambiguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks.
Published: Stephen G. Dimmock & Roy Kouwenberg & Olivia S. Mitchell & Kim Peijnenburg, 2016. "Ambiguity aversion and household portfolio choice puzzles: Empirical evidence," Journal of Financial Economics, vol 119(3), pages 559-577.