Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

TitleAmbiguity aversion and household portfolio choice puzzles: Empirical evidence
Publication TypeJournal Article
Year of Publication2016
AuthorsDimmock, Stephen G., Roy Kouwenberg, Olivia S. Mitchell, and Kim Peijnenburg
JournalJournal of Financial Economics
ISBN Number0304-405X
AbstractWe test the relation between ambiguity aversion and five household portfolio choice puzzles: nonparticipation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative US 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.