Individual Portfolios Research Articles

Individual home bias, portfolio churning and performance

This study investigates economic consequences of individual investors’ home bias and portfolio churning in their personal pension accounts. The empirical analysis is carried out within a Heckman style two-stage framework to account for selection bias with respect to individuals’ investment activity, and to allow for an endogenously determined home bias, portfolio churning and performance. Results indicate that home bias induces a worse risk-adjusted performance. Home-biased individuals’ relatively bad performance originates in insufficient risk-reduction, due to a lack of international diversification. A higher degree of portfolio churning also deteriorates performance, despite the fact that churning is not associated with any direct transaction costs. However, home-biased individuals do not churn portfolios as often as individuals with a larger share of international asset holdings, which diminishes the negative effects of home bias on performance. Overconfidence is driven by a return-chasing behavior, where overconfident individuals favor international assets with high historical returns. Individuals with actual skill are more often men than women, are not tempted by high historical returns, and use international assets for the right reason – diversification.

Individual Investors, Location, and Portfolio Choice

Individual Investors, Location, and Portfolio Choice

Implementing reflective portfolios for promoting autonomous learning among EFL college students in Taiwan

This article depicts challenges for students and teachers involved in developing a reflective portfolio to promote autonomous learning in Taiwan. One hundred and one students in a Taiwan university completed their individual portfolio projects. A pre-course questionnaire, post-course self-evaluation, and the instructor’s field notes were the data collection tools. The pre-course questionnaire results showed the students had neither experience of compiling portfolios nor knowledge of autonomous learning. The teacher could not let all decision-making power go to such inexperienced students. Instead, the teacher’s role needed to alternate between decision-maker, facilitator and resource person to help the students learn to be autonomous. The students’ major tasks were to manage their time and learning, and develop the critical thinking skills considered inadequately taught in Asia. The portfolio enabled the students to engage in multi-domain learning and to practise autonomous learning. The students’ awareness of autonomous learning was thus enhanced. Pedagogical suggestions are made for improving the effectiveness of portfolios for promoting autonomous learning.

Irrational Diversification; An Examination of Individual Portfolio Choice

We study individual portfolio choice in a laboratory experiment and find strong evidence for heuristic behavior. The subjects tend to focus on the marginal distribution of an asset, while largely ignoring its diversification benefits. They follow a conditional 1/n diversification heuristic as they exclude the assets with an “unattractive” marginal distribution and divide the available funds equally between the remaining, “attractive” assets. This strategy is applied even if it leads to allocations that are dominated in terms of first-order stochastic dominance and is clearly irrational. In line with these findings, we find that framing and problem presentation have substantial influence on portfolio decisions.

Overconfidence Among Professional Investors: Evidence from Mutual Fund Managers

We examine overconfidence among equity mutual fund managers. While overconfidence has been extensively documented among retail investors, evidence from professional investors is scarce. Consistent with theories of overconfidence, we find that fund managers trade more after good past performance. The higher trading activity after good performance is driven by individual portfolio performance, while the market performance has no significant impact. We rule out some alternative explanations for our results like increased trading as a response to tournament incentives, as a response to inflows, or as a rational reaction due to managerial learning about abilities.

Route Choice under the Microscope

This study demonstrates a process-oriented approach to the analysis of decision making through the example of the interactive route choice problem. The core of the work consists in the design of the methodological framework, combining the psychological research method of thinking aloud for acquisition of data concerning cognitive processes generated in the course of decision making and the method of semantic content analysis for their processing and for drawing inferences. Results show that the process-oriented analysis of decision making has the potential to disclose facts hidden beyond the observed behavior. The analysis of process data obtained during laboratory experiments showed that the set of strategies applied by subjects is much more diverse than is assumed in most existing models of route choice. Subjects compared travel times on alternate routes to choose the fastest one, updated actual travel times by exploratory route switching, insisted on habitual choice of one route, anticipated choices of others to get to the minority side, and so forth. These results suggest that the diversity in observed behavior may be to some extent caused by the diversity in individual portfolios of applied choice strategies.

Are Momentum Strategies Still Profitable for U.S. Equity?

This paper examines the performance of momentum strategies in previous years, and evaluates the effectiveness of the Fama and French 3-Factor Model and the Carhart 4-Factor Model in predicting momentum returns. Momentum strategies are less profitable after the time period considered in Jegadeesh and Titman (2001), and actually produce negative returns on average in the previous five years. The Fama and French 3-Factor Model performs well predicting returns for each individual portfolio constructed based off returns, but does poorly explaining the momentum strategy portfolio returns. Alternatively, the Carhart 4-Factor Model does a good job explaining the momentum strategy portfolio returns.

ESTIMATION AND IMPACT OF GENDER DIFFERENCES IN RISK TOLERANCE

This paper provides numerical estimates of the distributions of risk tolerance for men and women. A simple model of individual portfolio choice is calibrated to data on Individual Retirement Accounts from the Health and Retirement Study to obtain the estimates. Results show that women tend to be less risk‐tolerant than men. The estimates are then used to measure the impact of risk tolerance on wealth accumulation. Simulations show that the difference in risk tolerance can account for around 10% of the gender difference in accumulated wealth. (JEL J16, G11, D81)

Human Capital, Endogenous Information Acquisition, and Home Bias in Financial Markets

Considerable attention has been devoted in the financial literature to excessive portfolio concentrations in domestic risky assets relative to those predicted by standard finance models-generally identified ashome bias-across international markets. The innovation we offer is ascribing home bias to endogenous information acquisition, orasset management(see EHY 2008), resulting from variations in human capital endowments. We develop discriminating hypotheses about the roles ofspecific andgeneralhuman capital endowments and the direct and opportunity costs of asset management in determining how home bias varies among individual investors and across financial markets. Our model also provides insights concerning differences across countries in the degree to which their domestic asset prices areinformation revealing.These hypotheses are tested against 8 national probability samples of individual portfolio compositions in the US over 1992-2007, and 7 international samples over 2001-2007 including 23 countries. The findings are consistent with our hypotheses.

What Explains the Variance of Prices and Returns?: Time-series Vs. Cross-section

This paper studies the relative importance of discount rates and cash flows with a focus on the differences between time-series and cross-sectional variance tests. I show that the following holds for the market, different types of portfolios, and individual stocks: (a) changes in expected returns drive the majority of the time-series volatility in price ratios and unexpected returns, and (b) differences in expected cash flows generate most of the cross-sectional variance in valuations and unexpected returns. Contrary to previous results in the literature, I conclude that individual stocks or portfolios look similar to the market. These findings are robust to short- and long-run regressions and hold when using dividends or (clean surplus accounting) earnings as cash flows. Finally, I present a simple present-value model with latent expected returns and dividend growth rates that explains most of these results.

Illusion of Control as a Source of Poor Diversification: Experimental Evidence

This paper investigates factors that influence individual portfolio allocations, with particular focus on illusion of control. Participants in the experiment form their portfolios of two risky lotteries and one risk-free alternative with the target to reach a predetermined income. Subjects show illusion of control as they excessively invest in a lottery when they are in charge of the chance move. This finding is amplified when self-selection is possible and mitigated when a well-diversified default portfolio is offered. Presenting sequences of chance moves prior to investment does not affect diversification. In line with excessive extrapolation, the higher the number of observed positive prior outcomes, the more likely is a positive prediction and in turn a higher investment.

Owner Incentives and Stock Returns: Evidence from Individual Owners' Portfolio Weights

We explore the relation between owner incentives and stock returns. Using a sample of 1.3 million individual investors on the Finnish stock market during a 12-year period, we develop an incentive index measuring how concentrated the shareholders' portfolios are in each firm. We find that the incentive index is significantly positively related to the operating performance of firms, indicating that owners who specialize their investments perform a valuable monitoring role. The stock price reacts positively to both increases in the incentive index and increases in corporate ownership concentration. Our principal result is that the level of the incentive index is significantly positively related to risk-adjusted stock returns in the cross-section, whereas corporate ownership concentration is only weakly positively related to stock returns. Overall, our results indicate that concentrated owners are value enhancing, while the market is not able to fully incorporate the information on individual owners' portfolio weights into prices.

Irrational Diversification: An Examination of the Portfolio Construction Decision

We study individual portfolio choice in a laboratory experiment and find strong evidence for heuristic behavior. The subjects tend to focus on the marginal distribution of an asset, while largely ignoring its diversification benefits. They follow a conditional 1/n diversification heuristic as they exclude the assets with an “unattractive” marginal distribution and divide the available funds equally between the remaining, “attractive” assets. This strategy is applied even if it leads to allocations that are dominated in terms of first-order stochastic dominance and is clearly irrational. In line with these findings, we find that framing and problem presentation have substantial influence on portfolio decisions.

Fight Or Flight? Portfolio Rebalancing by Individual Investors*

This paper investigates the dynamics of individual portfolios in a unique dataset containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We found some evidence that households rebalance towards a higher risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well, and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern which is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly, and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks.

Default, Framing and Spillover Effects: The Case of Lifecycle Funds in 401(K) Plans

Important behavioral factors such as default and framing effects are increasingly being employed to optimize decision-making in a variety of settings, including individually-directed retirement plans. Yet such approaches may have unintended effects, as we show with regard to the introduction of lifecycle funds in U.S. 401(k) plans. As anticipated, lifecycle funds do reshape individual portfolio choices through large default and framing effects. But unexpectedly, they also create a new class of investors which holds these funds as part of more complex portfolios. Our results are directly relevant to those interested in retirement plan design and retirement security; they also highlight the importance of assessing such spillover effects in other consequential settings where behavioral economics techniques may be employed.

The Efficiency of Pension Menus and Individual Portfolio Choice in 401(K) Pensions

Though millions of US workers have 401(k) plans, few studies evaluate participant investment performance. Using data on over 1,000 401(k) plans and their participants, we identify key portfolio investment inefficiencies and attribute them to offered investment menus versus individual portfolio choices. We show that the vast majority of 401(k) plans offers reasonable investment menus. Nevertheless, participants 'undo' the efficient menu and make substantial mistakes: in a 20-year career it will reduce retirement wealth by one-fifth, in fact, more than what a naive allocation strategy would yield. We outline implications for plan sponsors and participants seeking to enhance portfolio efficiency: don’t just offer or choose more funds, but help people invest smarter.

On Local Housing Supply Elasticity

Housing markets have been established as fundamental to understanding business cycles, financial market stability, labor mobility, household wealth, individual portfolio allocation, and urban dynamics. What determines local housing supply elasticities and prices? In this paper I give empirical content to the concept of land availability by processing satellite-generated data on elevation and presence of water bodies to precisely estimate the amount of developable land in each metro area. I demonstrate that development is effectively curtailed by the presence of slopes above 15% and that most areas that are widely regarded as supply-inelastic are, in fact, severely land-constrained by their topography. Furthermore, the extent of topographical constraints correlates positively and strongly with regulatory barriers to development. Immigration, high taxes, politics, and communitarian social capital are also predictive of more restrictive residential land regulations. I estimate a system of equations where housing prices, construction, and regulations are all determined endogenously. Housing supply elasticities can be well-characterized as functions of both physical and regulatory constraints, which in turn are endogenous to prices and past growth. The results provide operational estimates of local supply elasticities in all major US metropolitan areas.

Applying VaR to REITs: A comparison of alternative methods

This study employs five methods to calculate the VaR of twelve REITs portfolios and evaluates the accuracy of these methods. Firstly, we find that the VaR varies among individual portfolios. The Hotel REITs has consistently the largest VaR. The low-leveraging portfolio tends to have the largest VaR measured by the parametric methods, while the high leveraging portfolio has the largest VaR calculated by the non-parametric methods. Secondly, each method performs differently at different confidence levels, and no method dominates the others. At the 95% confidence level, the EWMA method performs relatively well. The EQWMA and the two non-parametric methods perform equivalently and slightly overestimate VaRs. The EQWMA T method ranks the bottom and significantly overestimates VaRs for all portfolios. At the 99% confidence level, the EQWMA method performs the best. The EQWMA T and the two non-parametric methods perform equivalently and may overestimate VaR for all portfolios. The EWMA method turns out to be the worst and tends to underestimate the VaR. These findings may provide more insights for institutional real estate investors.

Common Effects in Imbalances and Returns: Style-Based Comovement and Flight-to-Quality

This paper examines common effects in monthly imbalances for New York Stock Exchange stocks over the period 1988 through 2004. Order imbalances for both individual stocks and portfolios display size and book-to-market based commonality that transcends marketwide effects. The three common factors in imbalances account for more than one-third of the explanatory power of the three-factor model of Fama and French (1993) and display predictable variation over the business cycle. Specifically, an improvement (deterioration) in economic conditions is associated with an increase (decline) in buying pressure for stocks in general, with the effects being stronger for small stocks than big stocks and for value stocks than growth stocks. These results are consistent with flight-to-quality patterns in trading and support a state variable interpretation of the size and value premiums in returns.

Teaching and Learning Guide for: Youth‐Subculture Studies: Sociological Traditions and Core Concepts

Studies of youth subcultures have been carried out for decades from varioustheoretical perspectives (including functionalism, social ecology, neo-Marxism,deviance and labeling, cultural studies, sports and leisure studies) as well as fromvarious methodological standpoints (e.g., deductive and inductive approaches,insider and outsider perspectives, ethnographic, historical comparative, and semiotics).The sociological study of youth subcultures thus offers a wide range of oppor-tunities to bring together an interesting topic for young people and theoreticalor methodological pedagogies.