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Diversification and its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status,” Working paper, The Wharton School

By Nikolai Roussanov, Suggestions Andrew Abel, O Alvarez, David Laibson, Marlena Lee, Hanno Lustig, Gregor Matvos, Kevin Murphy, Stavros Panageas, Monika Piazzesi, Andrew Postlewaite, Jose-victor Rios-rull, Jesse Shapiro, Andrei Shleifer, Harald Uhlig, Annette Vissing-jørgensen, Jessica Wachter, Amir Yaron and Moto Yogo

Abstract

Incorporating preference for social status into a simple model of portfolio choice helps to explain a range of qualitative and quantitative stylized facts about the heterogeneity in asset holdings among U.S. households. I specify preferences for status parsimoniously as a function of a household’s wealth relative to aggregate wealth. In the model, investors hold concentrated portfolios, suggesting, in particular, a possible explanation for the apparently small premium for undiversified entrepreneurial risk. Consistent with empirical evidence, the wealthier households own a disproportionate share of risky assets, particularly private equity, and experience more volatile consumption growth. The model is calibrated to match the empirical level of risky asset holdings without generating excessive volatility of consumption growth and crosssectional wealth mobility. I am grateful to John Cochrane, John Heaton, Tobias Moskowitz, and Pietro Veronesi for their advic

Year: 2007
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