Taring All Investors with the Same Brush? Evidence for Heterogeneity in Individual Preferences from a Maximum Likelihood Approach

Abstract

note that parts of this paper were written when Sven Jakusch was working at Ernst & Young Wirtschaftspruefungsgesellschaft GmbH, however, any views, statements or opinions expressed in this paper are solely those of the authors and not related to Ernst & Young. 1 Heterogeneity in Risk Preferences-Evidence from a Maximum Likelihood Approach Heterogeneity in Risk Preferences-Evidence from a Maximum Likelihood Approach Zhu (2006) and Kaustia (2010)). Other studies find that individual investors systematically miss the merits of diversification (Kumar and Goetzmann (2008)), are attracted by stocks that can be characterized by low expected returns and highly positive skewness (Mitton and Vorkink (2007), Kumar and Goetzmann (2008), Kumar (2009b)), tend to more familiar investments (Barber and Odean (2008), Keloharju et al. (2012)), trade more after an increase in stock market prices (Cohen et al. (2002), Dhar and Kumar (2002), Hvidkjaer (2006)) and are succumb to various cognitive traps that negatively affect their performance (e.g. DeBondt (1998), Barber and Odean (2000) and Barber et al. (2009)). Empirical evidence suggests that these trading patterns, if emerging concurrently, have the potential to affect cross-sectional dependence in returns (see e.g. Grinblatt and Han (2005b) and Han and Kumar (2010) for the impact of trading pattern and Kumar (2007) for evidence on portfolio choice), variations in market volatility and prices (