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An Experimental Examination of Portfolio Choice

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  • Lucy F. Ackert
  • Bryan K. Church
  • Li Qi

Abstract

Investors do not hold optimal portfolios. We use an experimental method to isolate factors that compel individuals to hold optimal portfolios. Our design includes two risky assets with perfectly negatively correlated payoffs so that all risk can be eliminated. We find that participants’ holdings approach optimal portfolios only under very specific conditions: the variance cost of holding an imbalanced portfolio is substantial and feedback on period-by-period outcomes is suppressed (eliminating the impact of cognitive biases resulting from misperceptions of randomness).

Suggested Citation

  • Lucy F. Ackert & Bryan K. Church & Li Qi, 2016. "An Experimental Examination of Portfolio Choice," Review of Finance, European Finance Association, vol. 20(4), pages 1427-1447.
    • Handle: RePEc:oup:revfin:v:20:y:2016:i:4:p:1427-1447.
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    File URL: http://hdl.handle.net/10.1093/rof/rfv036
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    References listed on IDEAS

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    1. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    2. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
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    Cited by:

    1. Gortner, Paul J. & van der Weele, Joël J., 2019. "Peer effects and risk sharing in experimental asset markets," European Economic Review, Elsevier, vol. 116(C), pages 129-147.
    2. Paul Gortner & Joël van der Weele, "undated". "Peer Effects and Risk Sharing in Experimental Asset Markets," Tinbergen Institute Discussion Papers 19-027/I, Tinbergen Institute.
    3. Jean-François Gajewski & Marco Heimann & Luc Meunier, 2022. "Nudges in SRI: The Power of the Default Option," Post-Print hal-03156921, HAL.
    4. Huber, Jürgen & Palan, Stefan & Zeisberger, Stefan, 2019. "Does investor risk perception drive asset prices in markets? Experimental evidence," Journal of Banking & Finance, Elsevier, vol. 108(C).
    5. Jean-Francois Gajewski & Marco Heimann & Luc Meunier, 2022. "Nudges in SRI: The Power of the Default Option," Journal of Business Ethics, Springer, vol. 177(3), pages 547-566, May.

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