Ambiguity Aversion and Household Portfolio Choice Puzzles: Empirical Evidence

65 Pages Posted: 11 Oct 2012 Last revised: 18 Feb 2020

See all articles by Stephen G. Dimmock

Stephen G. Dimmock

National University of Singapore; Asian Bureau of Finance and Economic Research (ABFER)

Roy Kouwenberg

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Mahidol University - College of Management; Erasmus University Rotterdam (EUR)

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Kim Peijnenburg

Netspar; Centre for Economic Policy Research (CEPR); EDHEC Business School - Department of Economics & Finance

Multiple version iconThere are 3 versions of this paper

Date Written: May 29, 2015

Abstract

We test the relation between ambiguity aversion and five household portfolio choice puzzles: non-participation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative U.S. 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, homebias, own-company stock puzzle, portfolio under-diversification, household finance

JEL Classification: G11, D81, D14, C83

Suggested Citation

Dimmock, Stephen G. and Kouwenberg, Roy R. P. and Kouwenberg, Roy R. P. and Mitchell, Olivia S. and Peijnenburg, Kim, Ambiguity Aversion and Household Portfolio Choice Puzzles: Empirical Evidence (May 29, 2015). Pension Research Council WP 2012-20, Available at SSRN: https://ssrn.com/abstract=2159965 or http://dx.doi.org/10.2139/ssrn.2159965

Stephen G. Dimmock

National University of Singapore ( email )

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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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Roy R. P. Kouwenberg

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

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3000 DR Rotterdam, NL 3062 PA
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Mahidol University - College of Management ( email )

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Bangkok, 10400
Thailand

HOME PAGE: http://https://www.cm.mahidol.ac.th/web/index.php/18-faculty/148-roy-kouwenberg-ph-d-cfa

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

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3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

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United States

Kim Peijnenburg

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

EDHEC Business School - Department of Economics & Finance ( email )

France

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