Solutions to the Asset Allocation Problem by Informed Respondents: The Significance of the Size‐of‐Bet and the 1/N Heuristic

Gordon L. Clark, Emiko Caerlewy‐Smith and John C. Marshall

Risk Management and Insurance Review, 2009, vol. 12, issue 2, 251-271

Abstract: Asset allocation is a classic topic in the theory of finance and a crucial issue for investment policy. Noted for its significance in driving pension fund performance, it is also an issue that individual investors consider when designing their investment portfolios. In theory, Markowitz and those following in his wake have an optimal solution. In practice, however, we show that when asked to allocate their own money to a set of asset classes (from relatively low risk to high risk) in an experimental situation, most of our informed respondents would vary their investment strategies according to the size‐of‐bet (the money value of assets to be invested). We also show that most participants in the study adopted one of three solutions to the posed problem only one of which could be thought consistent with Benartzi and Thaler's 1/n heuristic. Since respondent solutions do not seem to be explained by formal education, professional qualifications, or training, it is suggested that solutions to the asset allocation problem are a product of strategies that mix intuitive responses to the initial tranche of money with theoretical cum practical shared conventions. Solutions to the asset allocation puzzle suggest that the size‐of‐bet could be a significant consideration for many informed investors. In conclusion, suggestions are made about taking forward closer scrutiny of these experimental results.

Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://doi.org/10.1111/j.1540-6296.2009.01166.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:rmgtin:v:12:y:2009:i:2:p:251-271

Access Statistics for this article

Risk Management and Insurance Review is currently edited by Mary A. Weiss

More articles in Risk Management and Insurance Review from American Risk and Insurance Association
Bibliographic data for series maintained by Wiley Content Delivery ().