Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

Stephen G. Dimmock; Roy Kouwenberg; Olivia S. Mitchell; Kim Peijnenburg

doi:10.1016/j.jfineco.2016.01.003

Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

Stephen G. Dimmock, Roy Kouwenberg, Olivia S. Mitchell, Kim Peijnenburg

Research output: Contribution to journal › Article › Scientific › peer-review

Abstract

We test the relation between ambiguity aversion and five household portfolio choice puzzles: nonparticipation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative US household survey, we measure ambiguity preferences using custom-designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market participation, the fraction of financial assets in stocks, and foreign stock ownership, but it is positively related to own-company stock ownership. Conditional on stock ownership, ambiguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks.

Original language	English
Pages (from-to)	559-577
Number of pages	19
Journal	Journal of Financial Economics
Volume	119
Issue number	3
DOIs	https://doi.org/10.1016/j.jfineco.2016.01.003
Publication status	Published - Mar 2016
Externally published	Yes

Keywords

Ambiguity aversion
Financial literacy
Home-bias
Household finance
Household portfolio puzzles
Own-company stock puzzle
Portfolio under-diversification
Stock market participation

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title = "Ambiguity aversion and household portfolio choice puzzles: Empirical evidence",

abstract = "We test the relation between ambiguity aversion and five household portfolio choice puzzles: nonparticipation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative US household survey, we measure ambiguity preferences using custom-designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market participation, the fraction of financial assets in stocks, and foreign stock ownership, but it is positively related to own-company stock ownership. Conditional on stock ownership, ambiguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks.",

keywords = "Ambiguity aversion, Financial literacy, Home-bias, Household finance, Household portfolio puzzles, Own-company stock puzzle, Portfolio under-diversification, Stock market participation",

author = "Dimmock, {Stephen G.} and Roy Kouwenberg and Mitchell, {Olivia S.} and Kim Peijnenburg",

year = "2016",

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language = "English",

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journal = "Journal of Financial Economics",

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TY - JOUR

T1 - Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

AU - Dimmock, Stephen G.

AU - Kouwenberg, Roy

AU - Mitchell, Olivia S.

AU - Peijnenburg, Kim

PY - 2016/3

Y1 - 2016/3

N2 - We test the relation between ambiguity aversion and five household portfolio choice puzzles: nonparticipation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative US household survey, we measure ambiguity preferences using custom-designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market participation, the fraction of financial assets in stocks, and foreign stock ownership, but it is positively related to own-company stock ownership. Conditional on stock ownership, ambiguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks.

AB - We test the relation between ambiguity aversion and five household portfolio choice puzzles: nonparticipation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative US household survey, we measure ambiguity preferences using custom-designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market participation, the fraction of financial assets in stocks, and foreign stock ownership, but it is positively related to own-company stock ownership. Conditional on stock ownership, ambiguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks.

KW - Ambiguity aversion

KW - Financial literacy

KW - Home-bias

KW - Household finance

KW - Household portfolio puzzles

KW - Own-company stock puzzle

KW - Portfolio under-diversification

KW - Stock market participation

U2 - 10.1016/j.jfineco.2016.01.003

DO - 10.1016/j.jfineco.2016.01.003

M3 - Article

SN - 0304-405X

VL - 119

SP - 559

EP - 577

JO - Journal of Financial Economics

JF - Journal of Financial Economics

IS - 3

ER -

Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

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Keywords

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