Discussion Paper Details

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Title: The Portfolio Composition Effect

Author(s): Jan Mueller-Dethard and Martin Weber

Publication Date: July 2020

Keyword(s): investment behavior, Mental accounting, Portfolio composition and risk preferences

Programme Area(s): Financial Economics

Abstract: This study asks whether a simple, counting-based measure of performance, which is the fraction of winner stocks in a portfolio, affects people's willingness to invest in the portfolio. We find experimental evidence that indicates that individuals allocate larger investments to portfolios with larger fractions of winner stocks, albeit alternative portfolios have realized identical overall portfolio returns and show identical expected risk-return characteristics. Building on our experimental findings, we show empirically that the proposed composition measure also matters for the demand of leading equity market index funds. A framework which combines category-based thinking and mental accounting can explain the effect.

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Bibliographic Reference

Mueller-Dethard, J and Weber, M. 2020. 'The Portfolio Composition Effect'. London, Centre for Economic Policy Research.