Working papers

Household Portfolio Underdiversification and Probability Weighting: Empirical Evidence,

with Steve Dimmock, Roy Kouwenberg, and Olivia Mitchell. Download paperDownload presentation. Download online appendix.

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.

Media mentions: NBER digestPBS.

Abstract:  We test the relation between probability weighting and household portfolio choice in a representative household survey, using custom-designed incentivized lotteries. On average, people display Inverse-S shaped probability weighting, overweighting low probability tail events. As theory predicts, our Inverse-S measure is positively associated with portfolio underdiversification, which results in significant Sharpe ratio losses. We analyze respondents’ individual stock holdings and find that people with higher Inverse-S tend to pick lottery-type stocks and hold positively-skewed equity portfolios. Furthermore, Inverse-S is positively associated with stock market non-participation. This paper is the first to link individuals’ elicited probability weighting and real-world choices under risk.

Ambiguity Attitudes about Investments - Evidence from the Field,

with Kanin Anantanasuwong, Roy Kouwenberg, and Olivia Mitchell. Download paper. Download online appendix.

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 Steffen Andersen and Olga Balakina.