Household Portfolio Underdiversification and Probability Weighting: Empirical Evidence,
Presented at HEC Paris, the London School of Economics, EDHEC, IESE, ESSEC, Cass Business School, Mannheim University, University of Southern Denmark, University of Cambridge, University of Warwick, the Singapore Symposium, the SFS Cavalcade, the Financial Intermediation Research Society Conference, the Western Finance Association, UBC Winter Finance Conference, the Adam Smith Workshop, SGF conference, CEPR Household Finance conference Lund, Helsinki Finance Summit, and European Financial Association Conference.
Abstract: We test whether probability weighting affects household portfolio choice in a representative survey. On average, people display inverse-S shaped probability weighting, overweighting low probability tail events. As theory predicts, probability weighting is positively associated with portfolio underdiversification and significant Sharpe ratio losses. Analyzing respondents’ individual stock holdings, we find higher probability weighting is associated with owning lottery-type stocks and positively-skewed equity portfolios. People with higher probability weighting are less likely to own mutual funds and more likely to either avoid equities or hold individual stocks. We are the first to empirically link individuals’ elicited probability weighting and real-world investment behavior.
Ambiguity Attitudes about Investments - Evidence from the Field,
Presented at Society for Experimental Finance Conference.
Abstract: Using an incentivized survey and a representative sample of investors, we elicit ambiguity attitudes toward a familiar company stock, a local stock index, a foreign stock index, and a crypto currency. We separately estimate ambiguity aversion (ambiguity preferences) and perceived ambiguity levels (perceptions about ambiguity), while controlling for unknown likelihood beliefs. We show that ambiguity aversion is highly correlated across different assets and can be summarized by a single underlying factor. By contrast, individuals’ perceived ambiguity levels differ depending on the type of asset and cannot be summarized by a single underlying factor. Perceived ambiguity is mitigated by financial literacy and education, while the preference component is correlated with risk aversion. Perceived ambiguity proves to be related to actual investment choices, validating our measure. Finally, our results imply that policies enhancing financial literacy and knowledge of financial markets can help stimulate equity market participation and reduce inequality, as these reduce peoples’ perceived levels of ambiguity about financial assets.
Work in progress
Portfolio Network Effects: Family, Colleagues, or Neighbors? with S. Andersen and O. Balakina.
Social Costs to Private Shocks. S. Andersen, and G. Parise
Experiments in Household Finance. S. Andersen, S. Dimmock, and K. Nielsen.