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What Drives Investors’ Portfolio Choices? It’s Not What You May Think

Investors are often seen as choosing portfolios based on their preferences. Each decides how much risk to take, allocates between stocks and safe assets, and builds a portfolio that reflects their beliefs. But in reality, observed portfolios tell only part of the story. Many investors who could invest in stocks simply do not, even when theory suggests they should. This paper introduces a new perspective. Portfolio choices are not driven by preferences alone, they are also shaped by frictions, small costs, inertia, and default options. The result is a subtle but powerful mechanism. What investors hold is not always what they want. Understanding this gap is key to explaining how portfolios are actually formed.

What Drives Investors’ Portfolio Choices?…