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Resuscitating Businessman Risk: A Rationale for Familiarity-Based Portfolios

Author

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  • Doriana Ruffino
Abstract
This paper studies two frequently observed portfolio behaviors that are seemingly inconsistent with rational portfolio choice. The first is the tendency of workers and entrepreneurs to hold their company's stock. The second is the propensity of workers to limit their equity holdings through time. The explanation offered here for both of these behaviors lies in the option to switch jobs when one?s company does poorly. This is equivalent to holding put options on one's own company stock and call options on the other company's stock, where both options must be exercised at the same time. Given these initial undiversified implicit financial holdings, workers need to allocate a relatively large share of their regular financial assets to their own company's stock and a relatively small share to the stock of their alternative employment simply to restore overall portfolio balance. I find that, under certain conditions, workers optimally hold almost 40% of their financial wealth in their company's stock.

Suggested Citation

  • Doriana Ruffino, 2012. "Resuscitating Businessman Risk: A Rationale for Familiarity-Based Portfolios," Carlo Alberto Notebooks 252, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:252
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    Cited by:

    1. Lusardi, Annamaria & Mitchell, Olivia S. & Curto, Vilsa, 2012. "Financial sophistication in the older population," CFS Working Paper Series 2012/08, Center for Financial Studies (CFS).
    2. Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," EIEF Working Papers Series 0812, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2008.

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    More about this item

    Keywords

    Life-Cycle Modeling; Industry(firm)-specific Risk; Job-switching Options; Portfolio Choice; Familiarity-based; Investments; Businessman Risk;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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