EconPapers    
Economics at your fingertips  
 

Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field

Stephen Dimmock, Roy Kouwenberg (), Olivia Mitchell and Kim Peijnenburg

No 13109, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We 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: cumulative prospect theory; household finance; household portfolio puzzles; portfolio underdiversification; probability weighting; rank dependent utility; Stock Market Participation (search for similar items in EconPapers)
JEL-codes: C83 D14 D81 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2018-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13109 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field (2018) Downloads
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:cpr:ceprdp:13109

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=13109

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2019-02-22
Handle: RePEc:cpr:ceprdp:13109