Wharton Pension Research Council Working Papers

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Working Paper

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We test whether probability weighting affects household portfolio choice in a representative survey. On average, people display inverse-S shaped probability weighting, overweighting low probability events. As theory predicts, probability weighting is positively associated with portfolio underdiversification and significant Sharpe ratio losses. Analyzing respondents’ individual stock holdings, we find higher probability weighting is associated with owning lottery-type stocks and positively-skewed equity portfolios. People with higher probability weighting are less likely to own mutual funds and more likely to either avoid equities or hold individual stocks. We are the first to empirically link individuals’ elicited probability weighting and real-world decisions 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.

JEL Code

G11, D81, D14, C83, D90

Working Paper Number



This project received funding from the TIAA Institute and Wharton School’s Pension Research Council/Boettner Center.

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. ©2020 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, Peter Bossaerts, Tabea Bucher-Koenen, Laurent Calvet, John Campbell, Francesco D’Acunto, Nicola Gennaioli, Anastasia Girshina, Nishad Kapadia, Alexander Klos, Sonya Lim, Michaela Pagel, Gianpaolo Parise, Valery Polkovnichenko, Paolo Sodini, Meir Statman, Raman Uppal, Stijn Van Nieuwerburgh (editor), Peter Wakker, Baolian Wang, Joe Zhang, and two anonymous referees; 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, BI-SHOF, CEPR Workshop on Household Finance, European Finance Association, Financial Intermediation Research Society, Helsinki Finance Summit, 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.

Additional Files

WP 2018 - 09 - Dimmock et al 08.31.20 Online Appendix.pdf (909 kB)
Online Appendix

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Economics Commons



Date Posted: 06 February 2019