Wharton Pension Research Council Working Papers

Document Type

Working Paper

Date of this Version



We test the relation between probability weighting and household portfolio choice in a representative household survey, using custom-designed incentivized lotteries. On average, people display Inverse-S shaped probability weighting, overweighting low probability tail events. As theory predicts, our Inverse-S measure is positively associated with portfolio underdiversification, which results in significant Sharpe ratio losses. We analyze respondents' individual stock holdings and find that people with higher Inverse-S tend to pick lottery-type stocks and hold positively skewed equity portfolios. Furthermore, Inverse-S is positively associated with stock market non-participation. This paper is the first to link individuals' elicited probability weighting and real-world choices under risk.


This paper is part of the NBER's Research Program on the Economics of Aging and the Working Group on Household Portfolios.


household finance, behavioral economics, probability weighting, rank dependent utility, cumulative prospect theory, salience theory, portfolio underdiversification, household portfolio puzzles, stock market participation

JEL Code

G11, D81, D14, C83, D90

Working Paper Number


Copyright/Permission Statement

The content is solely the responsibility of the authors and does not represent official views of the TIAA Institute or the Wharton School’s Pension Research Council/Boettner Center. ©2019 Dimmock, Kouwenberg, Mitchell, and Peijnenburg.


For assistance with the survey, the authors gratefully acknowledge Tim Colvin, David Grant, and the American Life Panel team at the RAND Corporation. For comments, we thank Jose Miguel Abito, Steffen Andersen, Tabea Burcher-Koenen, John Campbell, Francesco D’Acunto, Nicola Gennaioli, Nishad Kapadia, Alexander Klos, Sonya Lim, Michaela Pagel, Gianpaolo Parise, Valery Polkovnichenko, Paolo Sodini, Meir Statman, Peter Wakker, and Joe Zhang; seminar participants at Cass Business School, EDHEC, ESSEC, HEC Paris, IESE Business School, London School of Economics, University of Cambridge, University of Mannheim, University of Southern Denmark, and University of Warwick; and participants at the Adam Smith Workshop, CEPR Workshop on Household Finance, Financial Intermediation Research Society, SFS Cavalcade, SGF Conference, Singapore Symposium, TIAA/PRC Symposium, UBC Winter Finance, and Western Finance Association Conferences. Yunju Cha and Yong Yu provided outstanding research assistance. We thank Marco Angrisani and Gary Mottola for sharing data from their ALP module. This project received funding from the TIAA Institute and Wharton School’s Pension Research Council/Boettner Center.

Included in

Economics Commons



Date Posted: 06 February 2019