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Diversification and Its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status


  • Nikolai Roussanov is at The Wharton School, University of Pennsylvania, and NBER. I am grateful to John Cochrane, John Heaton, Tobias Moskowitz, and Pietro Veronesi for their advice and encouragement. I also benefited from comments and suggestions by Andrew Abel, Fernando Alvarez, George-Marios Angeletos, Nicholas Barberis, Frederico Belo, Hui Chen, Raj Chetty, George Constantinides, Darrell Duffie, Raife Giovinazzo, William Goetzmann, João Gomes, Luigi Guiso, Lars Hansen, Campbell Harvey (the Editor), Erik Hurst, Roman Inderst, Urban Jermann, Timothy Johnson, Kenneth Judd, Ron Kaniel, Leonid Kogan, David Laibson, Marlena Lee, Deborah Lucas, Hanno Lustig, Gregor Matvos, Stavros Panageas, Ľuboš Pástor, Monika Piazzesi, Łukasz Pomorski, Andrew Postlewaite, Jesse Shapiro, Annette Vissing-J⊘rgensen, Jessica Wachter, Amir Yaron, Motohiro Yogo, and Stephen Zeldes, as well as the anonymous referee and Associate Editor, and seminar participants at a number of institutions and conferences. This research was partially supported by the Ewing Marion Kauffman Foundation and by the National Center for Supercomputing Applications, as well as the Sanford Grossman Fellowship in honor of Arnold Zellner.


Social status concerns influence investors' decisions by driving a wedge in attitudes toward aggregate and idiosyncratic risks. I model such concerns by emphasizing the desire to “get ahead of the Joneses,” which implies that aversion to idiosyncratic risk is lower than aversion to aggregate risk. The model predicts that investors hold concentrated portfolios in equilibrium, which helps rationalize the small premium for undiversified entrepreneurial risk. In the model, status concerns are more important for wealthier households. Consequently, these households own a disproportionate share of risky assets, particularly private equity, and experience greater volatility of consumption, consistent with empirical evidence.