Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

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

JEL Classification

G11
D81
D14
C83

Cited by (0)

This paper is part of the National Bureau of Economic Research's Program on the Economics of Aging and the Working Group on Household Portfolios. We gratefully acknowledge support from the Network for Studies on Pensions, Ageing, and Retirement (Netspar Grant Number RG2011.02); the National Institute on Aging, P30 AG-012836-18; the Wharton School's Pension Research Council and Boettner Center for Pensions and Retirement Security; the National Institute of Child Health and Development Population Research Infrastructure Program, R24 HD-044964-9; the American Life Panel teams at the RAND Corporation and University of Southern California; and the Wharton Behavioral Laboratory. For comments we thank Jawad Addoum, Sahil Bajaj, Laurent Calvet, Hector Calvo-Pardo, Andrew Caplin, Carlos Cueva, Nicola Gennaioli, Stefano Giglio, Luigi Guiso, George Korniotis, Debrah Meloso, Nicola Pavoni, Arno Riedl, David Schreindorfer, Noah Stoffman, Stefan Trautmann, Martijn van den Assem, and Peter Wakker. We acknowledge helpful suggestions received at conferences at the American Economic Association, Ambiguity and Robustness in Macroeconomics and Finance, European Economic Association, European Finance Association, European Household Finance, Experimental Finance, Financial Intermediation Research Society, Mitsui Finance Symposium, Netspar Workshop, Society for Financial Studies Cavalcade, and Western Finance Association. Tania Gutsche, Arie Kapteyn, Bart Orriens, and Bas Weerman provided able assistance with the survey, and Yong Yu provided outstanding programming assistance. The content is solely our responsibility and does not necessarily represent the official views of the National Institute of Aging, the National Institutes of Health, or any other institution providing funding for this study or with which we are affiliated.