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What Drives Investors' Portfolio Choices? Separating Risk Preferences from Frictions

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  • Taha Choukhmane
  • Tim de Silva

Abstract

We study the role of risk preferences and frictions in portfolio choice using variation in 401(k) default options. Patterns of active choice in response to different default funds imply that, absent participation frictions, 94% of investors prefer holding stocks, with an equity share of retirement wealth declining with age—patterns markedly different from observed allocations. We use this quasi-experiment to estimate a life cycle model and find a relative risk aversion of 2.5, EIS of 0.25, and $160 portfolio adjustment cost. Our results suggest that low levels of stock market participation in retirement accounts are due to participation frictions rather than non-standard preferences such as loss-aversion.

Suggested Citation

  • Taha Choukhmane & Tim de Silva, 2024. "What Drives Investors' Portfolio Choices? Separating Risk Preferences from Frictions," NBER Working Papers 32476, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32476
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    2. Gomes, Francisco & Haliassos, Michael & Ramadorai, Tarun, 2026. "New frontiers in household finance," LSE Research Online Documents on Economics 138280, London School of Economics and Political Science, LSE Library.

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G5 - Financial Economics - - Household Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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