The Portfolio Composition Effect

Martin Weber and Jan Mueller-Dethard

No 15012, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Portfolio composition; Investment behavior; Risk preferences; Mental accounting (search for similar items in EconPapers)
JEL-codes: D84 G11 G12 G40 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-cwa and nep-exp
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