Household Portfolio Diversification: A Case for Rank-Dependent Preferences

Author: Polkovnichenko, Valery

Source: Review of Financial Studies, Volume 18, Number 4, 2005 , pp. 1467-1502(36)

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Abstract:

The proliferation of novel preference theories in financial economics is hampered by a lack of non-experimental evidence and by the theories’ additional complexity which has not been shown to be critical in applications. In this article I present arguments in support of preferences with rank dependency. Using the Survey of Consumer Finances data, I document two widespread patterns inconsistent with expected utility: (i) many households simultaneously invest in well-deversified funds and in poorly-diversified portfolios of stocks; and (ii) some households with substantial savings do not invest anything in equities. I show that portfolio choice models with rank-dependent preferences, plausibly parameterized and under fully rational assumptions, are quantitatively consistent with the observed diversification. These results call for further efforts to integrate the models of rank-dependent preferences in portfolio theory and asset pricing.

Keywords: brain metastases; HRQoL; stereotactic radiosurgery

Document Type: Research article

DOI: http://dx.doi.org/10.1093/rfs/hhi033

Publication date: 2005-01-01

More about this publication?

The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.