Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

How do human beings make decisions when, as the evidence indicates, the assumptions of the Bayesian rationality approach in economics do not hold? Do human beings optimize, or can they? Several decades of research have shown that people possess a toolkit of heuristics to make decisions under certainty, risk, subjective uncertainty, and true uncertainty (or Knightian uncertainty). We outline recent advances in knowledge about the use of heuristics and departures from Bayesian rationality, with particular emphasis on growing formalization of those departures, which add necessary precision. We also explore the relationship between bounded rationality and libertarian paternalism, or nudges, and show that some recent objections, founded on psychological work on the usefulness of certain heuristics, are based on serious misunderstandings.

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“…[47] (3) "Out of 10 women who test positive as you did, only 1 has breast cancer." [20] (4) The chance that you have breast cancer is about 1%."…”

Section: Frequency Versus Probability Format and The Ktando Programmentioning

confidence: 99%

Heuristics and Public Policy: Decision Making Under Bounded Rationality

2018

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“…Jappelli and Padula (2014) found that financial literacy has positive correlation with investors' wealth and portfolio diversification and suggested that financial literacy allows investor better investment opportunities. Dimmock, Kouwenberg, Mitchell, and Peijnenburg (2016) pointed out that financial literacy improves the financial decisions of investor and reduces the ambiguity aversion. Bachmann and Hens (2015) elucidated that investors who rely on professionals' advice and consult with others, have higher investment because they consistently learn from financial advisors.…”

Section: Literature Review Financial Literacy and Portfolio Diversifimentioning

confidence: 99%

Financial Literacy, Behavioral Biases and Investor's Portfolio Diversification: Empirical Study of an Emerging Stock Market

Anwar¹,

Khan²,

Rehman³

2017

j.financ.econ.res

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The purpose of this study is to check the impact of financial literacy and behavioral biases on investor's portfolio diversification. Data were collected through questionnaire using sample size of 181 investors trading in Pakistan Stock Market. The results indicate that financial literacy has insignificant and positive influence on investor's portfolio diversification, behavioral biases such as familiarity and availability biases have insignificant and negative while overconfidence bias has significant negative impact on investor's portfolio diversification. Portfolio size also has significant positive impact on portfolio diversification. The findings suggest the implementation of financial literacy programs to facilitate the investors, trading in different stocks. The implications for practice were discussed in detail.

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“…Other empirical studies mainly focus on portfolio choice problems. For instance, Dimmock et al (2016) investigated market participation of households under ambiguity. They found that investors under-diversified their portfolios due to ambiguous information and the 2008 financial crisis could be contributed to ambiguity aversion.…”

Section: Introductionmentioning

confidence: 99%

The effect of ambiguity on the UK stock market: evidence from a new empirical approach

Tan

Manahov

Thijssen

2017

Investment Management and Financial Innovations

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AUTHORS Run Qing Tan Viktor Manahov Jacco Thijssen ARTICLE INFORun Qing Tan, Viktor Manahov and Jacco Thijssen (2017) AbstractThis study developed a new ambiguity measure using the bid-ask spread. The results suggest that the degree of ambiguity has an impact on the daily UK stock market returns, but ambiguity does not cause changes in the returns. This implies that UK stock prices or returns cannot be predicted using variation in the degree of ambiguity through linear models, such as the VAR model, which was used in the study. The two sets of results in the study show that the degree of ambiguity from the previous two days might affect stock market returns. The authors observe that an increase in the degree of ambiguity two days ago is associated with a positive premium required by the investors. On the other hand, the degree of ambiguity tends to be affected by its past five-day values. Thus, the degree of ambiguity seems to persist for five days until investors update their priors. The intuition behind the result is that the degree of ambiguity can affect the returns of the UK stock market and UK stock market returns can in turn have an impact on the degree of ambiguity. The authors also observe that the degree of ambiguity does not seem to predict stock market returns in the UK when one applies linear models. However, this does not mean that there is no non-linear relationship between the degree of ambiguity and stock market returns or stock returns.

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Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

Cited by 318 publications

References 75 publications

Heuristics and Public Policy: Decision Making Under Bounded Rationality

Heuristics and Public Policy: Decision Making Under Bounded Rationality

Financial Literacy, Behavioral Biases and Investor's Portfolio Diversification: Empirical Study of an Emerging Stock Market

The effect of ambiguity on the UK stock market: evidence from a new empirical approach

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