Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field

Stephen Dimmock, Roy Kouwenberg, Olivia Mitchell and Kim Peijnenburg

No 24928, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C83 D14 D81 G11 (search for similar items in EconPapers)
Date: 2018-08
Note: AG PE
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Published as Stephen G Dimmock & Roy Kouwenberg & Olivia S Mitchell & Kim Peijnenburg, 2021. "Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field," Review of Financial Studies, Society for Financial Studies, vol. 34(9), pages 4524-4563.

Downloads: (external link)
http://www.nber.org/papers/w24928.pdf (application/pdf)

Related works:
Journal Article: Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field (2021)
Working Paper: Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field (2018)
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:nbr:nberwo:24928

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w24928

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().