Portfolios of the Rich

Researchers have traditionally assumed that theportfolio allocation patterns of the wealthy are simply a scaled-up version ofthe average household's portfolio; however, data on the wealthy, particularlythe 1962-63 Survey of Financial Characteristics of the Consumers and the 1983Survey of Consumer Finances indicate that the most important way in which theportfolios of the rich differ from others is that the rich hold a much higherproportion of their portfolios in risky investments, particularly investmentsin their own entrepreneurial enterprises. There are three explanations for this distinction.The first is thatthere is an immutable variation in risk aversion across households and thatrisk tolerance can result in wealth; the data, however, fail to find acorrelation between wealth growth and expressed risk aversion.Second, itis possible that the observed patterns are a consequence of capital marketimperfections; in light of evidence that the behavior of the wealthy does nottake into account such imperfections, however, this explanation isunlikely.Finally, it is possible that wealth enters the household'sutility function as a luxury good, that risk aversion diminishes as wealthincreases.Several features of the data suggest that risk aversion isindeed a decreasing function of wealth.Other features, particularly thetendency of the wealthy to concentrate their investments in their own ventures,suggest that capital market imperfections are also important.Much of thedata can be explained by assuming that bequests are a luxury good and thatcapital market imperfections require entrepreneurial ventures to beself-financed and self-managed.(SAA)