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

Abstract

We present an empirical model of portfolio choice that allows for nonparametric estimation of investors' (subjective) expectations and risk preferences. Using a comprehensive dataset of 401(k) plans from 2009 through 2019, we explore the heterogeneity in asset allocations across plans using our empirical framework. Our estimates indicate that differences in expectations play a first-order role in explaining portfolios. We also show that investors appear to form expectations based on local sources of information such as county-level GDP growth and employer past performance. Overall, our findings are consistent with a model in which heterogeneity in investor expectations reflects idiosyncratic experiences and local environments.

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

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