Household Portfolio Diversification: A Case for Rank-Dependent Preferences
The proliferation of novel preference theories in financial economics is hampered by a lack of non-experimental evidence and by the theories' additional complexity which has not been shown to be critical in applications. In this article I present arguments in support of preferences with rank dependency. Using the Survey of Consumer Finances data, I document two widespread patterns inconsistent with expected utility: (i) many households simultaneously invest in well-deversified funds and in poorly-diversified portfolios of stocks; and (ii) some households with substantial savings do not invest anything in equities. I show that portfolio choice models with rank-dependent preferences, plausibly parameterized and under fully rational assumptions, are quantitatively consistent with the observed diversification. These results call for further efforts to integrate the models of rank-dependent preferences in portfolio theory and asset pricing. Copyright 2005, Oxford University Press.
Year of publication: |
2005
|
---|---|
Authors: | Polkovnichenko, Valery |
Published in: |
Review of Financial Studies. - Society for Financial Studies - SFS. - Vol. 18.2005, 4, p. 1467-1502
|
Publisher: |
Society for Financial Studies - SFS |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Probability weighting functions implied in options prices
Polkovnichenko, Valery, (2013)
-
Risk Attitudes Toward Small and Large Bets in the Presence of Background Risk
Chapman, David A., (2011)
-
Cautious Risk Takers: Investor Preferences and Demand for Active Management
POLKOVNICHENKO, VALERY, (2019)
- More ...