Proceedings | Finance area | Year 2018 | |
Household Portpolio Underdiversification and Probability Weighting: Evidence from the Fieldby S.G. Dimmock; Roy Kouwenberg; O.S. Mitchell; K. Piejnenburg | |
Research in Behavioral Finance conference 2018 in
Amsterdam, Natherlands 20-21 September 2018 |
AbstractWe 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.
Keywords: - |