Portfolio Choice and Menu Exposure

36 Pages Posted: 9 Mar 2006

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Anders Karlsson

Stockholm University - Department of Corporate Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Centre for Economic Policy Research (CEPR)

Date Written: February 7, 2006


We study the impact of menu representation on portfolio choice and we show that investors choose assets as a function of the way they are represented in the menu available to them. We use the choices of mutual funds for retirement accounts of the Swedish population. We show that investors prefer the funds that belong to categories that are more represented in the menu. More numerous categories attract more investment than what portfolio theory would suggest. Moreover, an exogenous change in the menu changes investor demand. An increase in the representation of a category in the menu increases investment in the funds belonging to the same category, including the already existing ones. By using information on the performance of the funds that investors choose and the degree of concentration of the investor portfolio, we show that there is a consistent positive correlation between the investor's sensitivity to menu exposure and his degree of informativeness. This suggests that menu exposure represents a rational way of coping with limited (private) information that decreases as information improves. Our findings shed light on the home bias puzzle and insight on the determinants of style investing. They also have direct normative implications in terms of Social Security reform.

Keywords: Portfolio choice, home bias, style investing

JEL Classification: G11, G14

Suggested Citation

Massa, Massimo and Karlsson, Anders and Simonov, Andrei, Portfolio Choice and Menu Exposure (February 7, 2006). EFA 2006 Zurich Meetings, Available at SSRN: https://ssrn.com/abstract=888661 or http://dx.doi.org/10.2139/ssrn.888661

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Anders Karlsson (Contact Author)

Stockholm University - Department of Corporate Finance ( email )

School of Business
SE-106 91 Stockholm
+46 8 162180 (Phone)
+46 8 153054 (Fax)

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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