Dimmock, Stephen GKouwenberg, RoyMitchell, Olivia SPeijnenburg, Kim2023-05-232023-05-232020-08-312019-02-06https://repository.upenn.edu/handle/20.500.14332/43550We test whether probability weighting affects household portfolio choice in a representative survey. On average, people display inverse-S shaped probability weighting, overweighting low probability events. As theory predicts, probability weighting is positively associated with portfolio underdiversification and significant Sharpe ratio losses. Analyzing respondents’ individual stock holdings, we find higher probability weighting is associated with owning lottery-type stocks and positively-skewed equity portfolios. People with higher probability weighting are less likely to own mutual funds and more likely to either avoid equities or hold individual stocks. We are the first to empirically link individuals’ elicited probability weighting and real-world decisions under risk.The content is solely the responsibility of the authors and does not represent official views of the TIAA Institute or the Wharton School’s Pension Research Council/Boettner Center. ©2020 Dimmock, Kouwenberg, Mitchell, and Peijnenburg.G11, D81, D14, C83, D90household financebehavioral economicsprobability weightingrank dependent utilitycumulative prospect theorysalience theoryportfolio underdiversificationhousehold portfolio puzzles.EconomicsWorking Paper