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Diversification and Its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status

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  • NIKOLAI ROUSSANOV

Abstract

Social status concerns influence investors' decisions by driving a wedge in attitudes toward aggregate and idiosyncratic risks. I model such concerns by emphasizing the desire to "get ahead of the Joneses," which implies that aversion to idiosyncratic risk is lower than aversion to aggregate risk. The model predicts that investors hold concentrated portfolios in equilibrium, which helps rationalize the small premium for undiversified entrepreneurial risk. In the model, status concerns are more important for wealthier households. Consequently, these households own a disproportionate share of risky assets, particularly private equity, and experience greater volatility of consumption, consistent with empirical evidence. Copyright (c) 2010 the American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 65 (2010)
Issue (Month): 5 (October)
Pages: 1755-1788

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Handle: RePEc:bla:jfinan:v:65:y:2010:i:5:p:1755-1788

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Cited by:
  1. Mariacristina De Nardi & Marco Cagetti & Marco Bassetto, 2011. "Credit Crunches and Credit Allocation in a Model of Entrepreneurship," 2011 Meeting Papers 262, Society for Economic Dynamics.
  2. YiLi Chien & Harold Cole & Hanno Lustig, 2007. "A Multiplier Approach to Understanding the Macro Implications of Household Finance," NBER Working Papers 13555, National Bureau of Economic Research, Inc.
  3. Grammig, Joachim & Schrimpf, Andreas, 2009. "Asset pricing with a reference level of consumption: New evidence from the cross-section of stock returns," Review of Financial Economics, Elsevier, vol. 18(3), pages 113-123, August.
  4. Smoluk, H.J. & Voyer, John, 2014. "The spirit of capitalism among the income classes," Review of Financial Economics, Elsevier, vol. 23(1), pages 1-9.
  5. Georgarakos, Dimitris & Haliassos, Michalis & Pasini, Giacomo, 2013. "Household debt and social interactions," SAFE Working Paper Series 1, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  6. Panousi, Vasia, 2009. "Capital Taxation with Entrepreneurial Risk," MPRA Paper 24237, University Library of Munich, Germany.
  7. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.
  8. Jessica A. Wachter & Motohiro Yogo, 2010. "Why Do Household Portfolio Shares Rise in Wealth?," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 3929-3965, November.
  9. Jason DeBacker & Bradley Heim & Vasia Panousi & Shanthi Ramnath & Ivan Vidangos, 2012. "The properties of income risk in privately held businesses," Finance and Economics Discussion Series 2012-69, Board of Governors of the Federal Reserve System (U.S.).
  10. Leonid Kogan & Dimitris Papanikolaou & Noah Stoffman, 2013. "Technological Innovation: Winners and Losers," NBER Working Papers 18671, National Bureau of Economic Research, Inc.
  11. Johnson, Timothy C., 2012. "Inequality risk premia," Journal of Monetary Economics, Elsevier, vol. 59(6), pages 565-580.

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