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Portfolio Choice in the Presence of Nontradeable Income: An Experimental Analysis

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  • Klos, Alexander

    () (Sonderforschungsbereich 504)

  • Weber, Martin

    () (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

Abstract

This paper reports the results of experiments on portfolio choice in the presence of nontradeable income. The nontradeable income part could either be riskless or risky (background risk). In many cases, we observe behavior which is qualitatively consistent with the predictions of normative theory. However, correlations between financial and nontradeable wealth are neglected. The computation of aggregated risk profiles helps subjects to partly overcome the deviations from normative theory due to neglect of correlations.

Suggested Citation

  • Klos, Alexander & Weber, Martin, 2004. "Portfolio Choice in the Presence of Nontradeable Income: An Experimental Analysis," Sonderforschungsbereich 504 Publications 04-01, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:04-01
    Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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    References listed on IDEAS

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    1. Hans P. Binswanger, 1980. "Attitudes Toward Risk: Experimental Measurement in Rural India," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 395-407.
    2. Degeorge, Francois & Jenter, Dirk & Moel, Alberto & Tufano, Peter, 2004. "Selling company shares to reluctant employees: France Telecom's experience," Journal of Financial Economics, Elsevier, vol. 71(1), pages 169-202, January.
    3. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-172, March.
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    5. Miquel Faig & Pauline Shum, 2002. "Portfolio Choice in the Presence of Personal Illiquid Projects," Journal of Finance, American Finance Association, vol. 57(1), pages 303-328, February.
    6. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-1289, November.
    7. Michael J. Brennan & Walter N. Torous, 1999. "Individual Decision Making and Investor Welfare," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(2), pages 119-143, July.
    8. William C. Brainard & William D. Nordhaus & Harold W. Watts, 1991. "Money, Macroeconomics, and Economic Policy: Essays in Honor of James Tobin," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262023253, January.
    9. Massimo Massa & Andrei Simonov, 2006. "Hedging, Familiarity and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 633-685.
    10. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
    11. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, June.
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    Cited by:

    1. Bergman, Nittai K. & Jenter, Dirk, 2007. "Employee sentiment and stock option compensation," Journal of Financial Economics, Elsevier, vol. 84(3), pages 667-712, June.
    2. Alexander Klos & Elke U. Weber & Martin Weber, 2005. "Investment Decisions and Time Horizon: Risk Perception and Risk Behavior in Repeated Gambles," Management Science, INFORMS, vol. 51(12), pages 1777-1790, December.
    3. Doerrenberg, Philipp & Duncan, Denvil & Zeppenfeld, Christopher, 2015. "Circumstantial risk: Impact of future tax evasion and labor supply opportunities on risk exposure," Journal of Economic Behavior & Organization, Elsevier, vol. 109(C), pages 85-100.
    4. Ungeheuer, Michael & Weber, Martin, 2016. "The Perception of Dependence, Investment Decisions, and Stock Prices," CEPR Discussion Papers 11585, C.E.P.R. Discussion Papers.
    5. Ungeheuer, Michael & Weber, Martin, 2016. "The Perception of Dependence and Investment Decisions," CEPR Discussion Papers 11188, C.E.P.R. Discussion Papers.

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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