Date of this Version
The Journal of Finance
Social status concerns influence investors' decisions by driving a wedge in attitudes toward aggregate and idiosyncratic risks. I model such concerns by emphasizing the desire to “get ahead of the Joneses,” which implies that aversion to idiosyncratic risk is lower than aversion to aggregate risk. The model predicts that investors hold concentrated portfolios in equilibrium, which helps rationalize the small premium for undiversified entrepreneurial risk. In the model, status concerns are more important for wealthier households. Consequently, these households own a disproportionate share of risky assets, particularly private equity, and experience greater volatility of consumption, consistent with empirical evidence.
This is the peer reviewed version of the following article, which has been published in final form at http://dx.doi.org/10.1111/j.1540-6261.2010.01593.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Roussanov, N. (2010). Diversification and Its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status. The Journal of Finance, 65 (5), 1755-1788. http://dx.doi.org/10.1111/j.1540-6261.2010.01593.x
Date Posted: 27 November 2017
This document has been peer reviewed.