Diversi fication, Gambling and Market Forces
62 Pages Posted: 14 Mar 2012 Last revised: 2 Oct 2013
Date Written: September 30, 2013
Though simple and appealing, mean-variance portfolio choice theory does not describe actual diversi fication choices by investors, especially their propensity to gamble and the solvency constraints they face. Using 8 million trades realized by 90,000 individual investors, we show that diversifi cation choices are in fact sharply driven by skewness of returns and portfolio value as well. We also show that the influence of diversifi cation on the skewness of returns is strongly shaped by market forces. These results survive several robustness checks, including controlling for individual heterogeneity and time-variability of stock price comovements.
Keywords: Underdiversi cation, solvency constraints, skewness, individual investors
JEL Classification: G11, G12
Suggested Citation: Suggested Citation