Portfolio Choice and Risk Attitudes: An Experiment

14 Pages Posted: 26 Jan 2010

See all articles by Gary Charness

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics

Uri Gneezy

University of California, San Diego (UCSD) - Rady School of Management

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Abstract

Using financial incentives, we study how portfolio choice (how much to invest in a risky asset) depends on three well-known behavioral phenomena: ambiguity aversion, the illusion of control, and myopic loss aversion. We find evidence that these phenomena are present and test how the level of investment is affected by these motivations; at the same time, we investigate whether participants are willing to explicitly pay a small sum of money to indulge preferences for less ambiguity, more control, or more frequent feedback/opportunities to choose the investment level. First, the observed preference for “control” did not affect investment behavior and in fact disappeared when participants were asked to actually pay to gain more control. Second, while people were indeed willing to pay for less ambiguity, the level of ambiguity did not influence investment levels. Finally, participants were willing to pay to have more frequent feedback opportunities to change their portfolio, even though prior research has shown that people invest less in risky assets (and earn less) in this case.

JEL Classification: B49, C91, D81, G11, G19

Suggested Citation

Charness, Gary and Gneezy, Uri, Portfolio Choice and Risk Attitudes: An Experiment. Economic Inquiry, Vol. 48, No. 1, pp. 133-146, January 2010. Available at SSRN: https://ssrn.com/abstract=1542302 or http://dx.doi.org/10.1111/j.1465-7295.2009.00219.x

Gary Charness (Contact Author)

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States
805-893-2412 (Phone)
805-893-8830 (Fax)

Uri Gneezy

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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