What Drives Variation in Investor Portfolios? Estimating the Roles of Beliefs and Risk Preferences
Working Paper 29604
DOI 10.3386/w29604
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We present an empirical model of portfolio choice that allows for nonparametric estimation of investors’ (subjective) expectations and risk preferences. Using a comprehensive dataset of 401(k) plans from 2009 through 2019, we explore the heterogeneity in asset allocations across plans using our empirical framework. Our estimates indicate that differences in expectations play a first-order role in explaining portfolios. We also show that investors appear to form expectations based on local sources of information such as county-level GDP growth and employer past performance. Overall, our findings are consistent with a model in which heterogeneity in investor expectations reflects idiosyncratic experiences and local environments.