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Optimal frequency of portfolio evaluation in a choice experiment with ambiguity and loss aversion

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  • Bellemare, Charles
  • Kröger, Sabine
  • Sossou, Kouamé Marius

Abstract

We estimate a structural model using data from a novel experiment investigating how investors’ preferred frequency of portfolio evaluations balance the opposing effects of ambiguity and loss aversion. Investors in the experiment face initial ambiguity concerning return distributions for an asset. They observe draws from the true return distribution of the asset, allowing them to reduce their ambiguity through time. We exploit portfolio choices and stated beliefs over possible return distributions to estimate preferences and ambiguity updating rules. We find that 70% of investors would opt for a high frequency of portfolio evaluations, reflecting the dominating effect of ambiguity aversion over loss aversion.

Suggested Citation

  • Bellemare, Charles & Kröger, Sabine & Sossou, Kouamé Marius, 2022. "Optimal frequency of portfolio evaluation in a choice experiment with ambiguity and loss aversion," Journal of Econometrics, Elsevier, vol. 231(1), pages 248-264.
    • Handle: RePEc:eee:econom:v:231:y:2022:i:1:p:248-264
    DOI: 10.1016/j.jeconom.2020.11.003
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    More about this item

    Keywords

    Portfolio choice; Feedback frequency; Narrow bracketing; Ambiguity aversion; Loss aversion; Decision theory;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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