Measuring efficiency and risk preferences in dynamic portfolio choice

Jacopo Magnani, Jean Paul Rabanal (), Olga Rud () and Yabin Wang

No 165, Working Papers from Peruvian Economic Association

Abstract: This paper uses non-parametric methods to study the efficiency (Dybvig, 1988) and risk-profile (Varian, 1988) of dynamic portfolio choices. We design an experiment which varies the number of states (complexity), and includes an equivalent static Arrow-Debreu problem. The results suggest that complexity reduces efficiency, as does lower cognitive ability. Efficiency is also lower in the static problem, and in the dynamic task it is mostly driven by a form of stop-loss strategy. Further, we find that a representative agent exhibits decreasing absolute risk aversion and constant relative risk aversion, despite significant individual heterogeneity.

Date: 2020-04
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-fmk
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