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

  • Klos, Alexander

    ()

    (Sonderforschungsbereich 504)

  • Weber, Martin

    ()

    (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)

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.

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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-01.

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Length: 37 pages
Date of creation: 03 Feb 2004
Date of revision:
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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  1. Miquel Faig & Pauline Shum, 2000. "Portfolio Choice in the Presence of Personal Illiquid Projects," Working Papers faig-00-03, University of Toronto, Department of Economics.
  2. Massa, Massimo & Simonov, Andrei, 2004. "Hedging, Familiarity and Portfolio Choice," CEPR Discussion Papers 4789, C.E.P.R. Discussion Papers.
  3. 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, 06.
  4. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
  5. Francois Degeorge & Dirk Jenter & Alberto Moel & Peter Tufano, 2000. "Selling Company Shares to Reluctant Employees: France Telecom's Experience," NBER Working Papers 7683, National Bureau of Economic Research, Inc.
  6. 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, June.
  7. 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.
  8. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
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