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Ambiguity Preferences and Portfolio Choices: Evidence from the Field

Author

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  • Milo Bianchi

    (Toulouse School of Economics)

  • Jean-Marc Tallon

    (Centre d'Economie de la Sorbonne - Paris School of Economics)

Abstract

We investigate the empirical relation between ambiguity aversion, risk aversion and portfolio choices. We match administrative panel data on portfolio choices with survey data on preferences over ambiguity and risk. We report three main findings. First, conditional on participation, ambiguity averse investors hold riskier portfolios. Second, they rebalance their portfolio in a contrarian direction relative to the market. Accordingly, their exposure to risk is more stable over time. Third, their portfolios experience higher returns, but they are also more sensitive to market trends. In several instances, the effects of ambiguity aversion stand in sharp contrast with those of risk aversion

Suggested Citation

  • Milo Bianchi & Jean-Marc Tallon, 2014. "Ambiguity Preferences and Portfolio Choices: Evidence from the Field," Documents de travail du Centre d'Economie de la Sorbonne 14065, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:14065
    DOI: 10.1287/mnsc.2017.3006
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    References listed on IDEAS

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    Cited by:

    1. Elisa Cavatorta & David Schröder, 2019. "Measuring ambiguity preferences: A new ambiguity preference survey module," Journal of Risk and Uncertainty, Springer, vol. 58(1), pages 71-100, February.
    2. Jim Engle-Warnick & Diego Pulido & Marine de Montaignac, 2016. "Trust, ambiguity, and financial decision-making," CIRANO Working Papers 2016s-44, CIRANO.
    3. Loïc Berger & Louis Eeckhoudt, 2020. "Risk, Ambiguity, And The Value Of Diversification," Working Papers hal-02910906, HAL.
    4. John Griffin, 2015. "Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset," Fordham Economics Discussion Paper Series dp2015-01, Fordham University, Department of Economics.
    5. Meglena Jeleva & Jean-Marc Tallon, 2016. "Ambiguïté, comportements et marchés financiers," L'Actualité Economique, Société Canadienne de Science Economique, vol. 92(1-2), pages 351-383.
    6. John Griffin, 2015. "Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset," Fordham Economics Discussion Paper Series dp2015-01er:dp2015-01, Fordham University, Department of Economics.
    7. Kostopoulos, Dimitrios & Meyer, Steffen & Uhr, Charline, 2020. "Ambiguity and investor behavior," SAFE Working Paper Series 297, Leibniz Institute for Financial Research SAFE.
    8. Milo Bianchi, 2018. "Financial Literacy and Portfolio Dynamics," Journal of Finance, American Finance Association, vol. 73(2), pages 831-859, April.
    9. Loïc Berger & Louis Eeckhoudt, 2021. "Risk, ambiguity, and the value of diversification," Post-Print hal-02910906, HAL.
    10. Sujoy Mukerji & Han N. Ozsoylev & Jean‐Marc Tallon, 2023. "Trading Ambiguity: A Tale Of Two Heterogeneities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(3), pages 1127-1164, August.
    11. Chen Li, 2017. "Are the poor worse at dealing with ambiguity?," Journal of Risk and Uncertainty, Springer, vol. 54(3), pages 239-268, June.
    12. Jean Paul Rabanal & Aleksei Chernulich & John Horowitz & Olga A. Rud & Manizha Sharifova, 2019. "Market timing under public and private information," Working Papers 151, Peruvian Economic Association.
    13. Echenique, Federico & Imai, Taisuke & Saito, Kota, 2019. "Decision Making under Uncertainty: An Experimental Study in Market Settings," Rationality and Competition Discussion Paper Series 197, CRC TRR 190 Rationality and Competition.
    14. Farago, Adam & Holmén, Martin & Holzmeister, Felix & Kirchler, Michael & Razen, Michael, 2019. "Cognitive Skills and Economic Preferences in the Fund Industry," OSF Preprints 964ba, Center for Open Science.
    15. Naqvi, Syed Muhammad Waqar Azeem & Rizvi, Syed Kumail Abbas & Orangzab & Ali, Muhammad, 2016. "Value at Risk at Asian Emerging Stock Markets," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 28(3), pages 311-319.
    16. Takao Asano & Yusuke Osaki, 2020. "Portfolio allocation problems between risky and ambiguous assets," Annals of Operations Research, Springer, vol. 284(1), pages 63-79, January.

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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