What Drives Variation in Investor Portfolios? Estimating the Roles of Beliefs and Risk Preferences

69 Pages Posted: 20 Dec 2021 Last revised: 3 Apr 2024

See all articles by Mark Egan

Mark Egan

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Alexander MacKay

Harvard University - Business School (HBS)

Hanbin Yang

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: April 3, 2024

Abstract

We present an empirical model of portfolio choice that allows for the nonparametric estimation of investors' (subjective) expectations and risk preferences. Utilizing a comprehensive dataset of 401(k) plans from 2009 through 2019, we explore heterogeneity in asset allocations across plans using our empirical framework. This framework enables us to recover investors’ beliefs about each asset and examine the implications and potential sources of those beliefs. Our estimates suggest that heterogeneity in expectations across investors accounts for twice as much variation in portfolio holdings as heterogeneity in risk aversion. Belief heterogeneity is driven in part by the idiosyncratic characteristics and experiences of investors, reflecting local sources of information such as county-level GDP and employers' past performance. Our findings suggest that, to the extent it is distortive, belief heterogeneity imposes modest costs on the median investor in terms of foregone annual returns, though the costs for the upper quartile are significant.

Keywords: Stock Market Expectations, Demand Estimation, Portfolio Choice, 401(k)

JEL Classification: G11, G12, G40, G51, J32, D14

Suggested Citation

Egan, Mark and MacKay, Alexander and Yang, Hanbin, What Drives Variation in Investor Portfolios? Estimating the Roles of Beliefs and Risk Preferences (April 3, 2024). Available at SSRN: https://ssrn.com/abstract=3988281 or http://dx.doi.org/10.2139/ssrn.3988281

Mark Egan

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Baker Library 365
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexander MacKay (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Boston, MA 02163
United States

HOME PAGE: http://alexandermackay.org/

Hanbin Yang

Harvard University ( email )

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
671
Abstract Views
2,483
Rank
69,060
PlumX Metrics