Seminar: Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field


Department of Systems Engineering and Engineering Management

The Chinese University of Hong Kong

Title: Household Portfolio Underdiversification and Probability Weighting: Evidence from the Field

Speaker: Prof. Roy Kouwenberg, Mahidol University

Abstract: We explore the relation between probability weighting and household portfolio underdiversification in a representative household survey, using custom-designed incentivized lotteries. On average, people display Inverse-S shaped probability weighting, overweighting the small probabilities of tail events. As theory predicts, our Inverse-S measure is positively associated with portfolio underdiversification, which results in significant Sharpe ratio losses. We match respondents’ individual stock holdings to CRSP data and find that people with higher Inverse-S tend to pick stocks with positive skewness and hold positively-skewed equity portfolios. We show that these choices reflect preferences rather than probability unsophistication or limited financial knowledge.

Biography: Roy Kouwenberg is Associate Professor and Director of the Ph.D. Program at Mahidol University, College of Management, in Bangkok. Roy received his Ph.D. in Finance from Erasmus University Rotterdam in the Netherlands and holds a Master’s degree in Econometrics from Erasmus. He is a CFA charterholder. Prior to joining CMMU, Roy held positions as a postdoctoral fellow at the University of British Columbia, Canada, as quantitative researcher at AEGON Asset Management, The Netherlands, and as assistant professor at the Asian Institute of Technology, Thailand. He is a visiting researcher at the Erasmus School of Economics, The Netherlands.

Dr. Roy’s research area is quantitative and empirical finance. His main focus is on behavioural portfolio choice, especially the impact of loss aversion and ambiguity aversion on stock market participation. He has also done extensive research on financial risk management, especially asset-liability management for pension funds and insurance firms. Since moving to Asia, Roy has also analyzed the corporate governance of listed firms in Asia.

Friday, October 19, 2018 - 16:30 to 17:30