I conduct a mean-variance portfolio choice economic experiment to evaluate how individuals’ portfolio choices deviate from what modern portfolio theory considers optimal. The experimental framework is comprised of three treatments. In each treatment the portfolio selection task involves choosing between two risky assets with zero correlation among their payoffs and one risk free asset. Participants are tasked with completing thirty choice rounds in which they must allocate a constant experimental capital amount to the available asset options after which they are shown period-by-period state-realizations. I utilize the definition of dominance as described in Neugebauer (2004), and Baltussen and Post (2011), that states an asset is dominant if it is attractive in isolation – the asset with the higher Sharpe-ratio. The risky asset, A or B, that is dominant, and the return characteristics of the dominant asset vary over treatments 1, 2, and 3. I find that, relative to theoretically optimal allocation, subjects disproportionately allocate their experimental capital to asset A, the asset with higher expected return and variance, in all treatments, and forgo the benefits to diversification that asset B provides. In order to analyze subjects’ allocation decisions across treatments, I utilize Robust OLS and Fixed Effects regression frameworks.
"Allocating in the Presence of Dominance: A Mean-Variance Portfolio Choice Economic Experiment,"
Gettysburg Economic Review: Vol. 11
, Article 4.
Available at: https://cupola.gettysburg.edu/ger/vol11/iss1/4