Can Risk Attitudes in the Lab Predict Actual Portfolio Choice?

Description

Recent advances in behavior finance and experimental economics have identified manyimportant aspects of risk preference such as ambiguity aversion, probability weighting,familiarity bias, and preference for uncertainty resolution. These preferences haveimportant implications for financial decision making and asset pricing theories. Yet,most of the studies have been confined with laboratory experiments with students assubjects. This calls into question whether the observed risk preference in the laboratorycan actually predict investment decisions among real market participants. For example,stock market participation decision and portfolio choice decision (what stocks are chosenand their weighting in the portfolio). In the proposed study, we will combine themethodology of laboratory experiment and survey to investigate how well observedchoices in a set of risk preference questionnaire based tasks can predict actualinvestment decisions. More specifically, participants will be invited to participate in ashort incentivized experiment where their risk attitudes will be elicited. Then, we willcorrelate the choices observed with the actual investment decisions to see if there arerelationships as implied by the models. To understand the impact of experience, we willhave different types of subjects, ranging from retail investors to professional fundmanagers.