Public Economics and Policy Seminar - Mats Köster (University of Düsseldorf)
Salience Effects in Portfolio Selection
Portfolio under-diversification is one of the most pervasive phenomena in household finance. We ask whether salience theory of choice under risk can synthesize seemingly disparate patterns of under-diversification that have been established in the literature: excessive investments in right-skewed assets and naive diversification. We derive predictions that allow us to distinguish salience theory from naive decision rules such as the 1/N-heuristic, and we test our novel predictions in a lab experiment: while salience theory provides an accurate description of portfolio selection with skewed assets, it can explain only parts, but not all of naive diversification with symmetric assets.