Damien Moore

Heterogeneity and Portfolio Choice: Theory and Evidence

In this paper, we summarize and add to the evidence on the large and systematic differences in portfolio composition across individuals with varying characteristics, and evaluate some of the theories that have been proposed in terms of their ability to account for these differences. Variation in background risk exposure from sources such as labor and entrepreneurial income or real estate holdings, and from factors such as transactions costs, borrowing constraints, restricted pension investments and life cycle considerations – can explain some but not all aspects of the observed cross-sectional variation in portfolio holdings in a traditional utility maximizing framework. In particular, fixed costs and life cycle considerations appear necessary to explain the lack of stock market participation by young and less affluent households. Remaining challenges for quantitative theories include the apparent lack of diversification in some unconstrained individual portfolios, and non-participation in the stock market by some households with significant financial wealth.