UCLouvain Seminar : Markus Dertwinkel-Kalt

Salience Effects in Portfolio Selection in Brussels (from 17-18 Oct)

Markus Dertwinkel-Kalt, Erasmus School of Economics, Erasmus Universiteit Rotterdam

Abstract : Portfolio under-diversification is one of the most pervasive phenomena in household finance. We show that salience theory of choice under risk synthesizes seemingly disparate explanations for under diversification that have been established in the literature: skewness preferences and correlation misperception. On the one hand, we study under-diversification with symmetric assets and find that salience theory can rationalize experimental evidence on naive diversification. On the other hand, we derive predictions on the role of correlation for portfolio selection with skewed assets, which allow us to distinguish between our salience-based explanation of under-diversification and naive decision rules such as the 1/N-heuristic. We plan to test our novel predictions in a lab experiment.