FNCE 239 Lecture Notes - Lecture 13: Idiosyncrasy, Reward System, Ambiguity Aversion
21 Apr 2016
School
Department
Course
Professor
Document Summary
Anti-hedging of labor income risk: employees invest 20-30% of their discretionary funds into their own company stock. You shouldn"t hold the stock of your own employer because you"re increasing your risk. You should hold stock that"s uncorrelated to this o. Many stockholders own only few stocks, but you should hold at least 100 stocks or a small amount of s&p to diversify. People have home bias and under-diversify because of familiarity, loyalty, and conformity (the tendency to hold the same stocks as your peers) People value risky gambles by weighing the utility of an outcome x by its probability p, where w is average wealth. You dislike being behind your peers and want to do well when everyone else is doing well. You"re happier when your wealth moves in parallel with everyone else"s wealth. Relative wealth- you care about being above the average conformism. ): u12 > 0 o o o o. Can explain why people hold so few stocks.
