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Life-Cycle Asset Allocation with Ambiguity Aversion and Learning

  • Kim Peijnenburg


Ambiguity and learning about the equity premium can simultaneously explain the low fraction of financial wealth allocated to stocks over the life cycle and the stock market participation puzzle. Individuals are ambiguous about the size of the equity premium and are averse to this ambiguity, resulting in lower stock allocations over the life cycle, consistent with the data. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity leads to underdiversification, home bias, lower Sharpe ratios, and higher savings. Similar results cannot be obtained by assuming higher risk aversion.


Corresponding author

*Peijnenburg (corresponding author),, EDHEC Business School Finance Department, and Netspar.


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I thank Johannes Binswanger, Stephen Brown (the editor), Laurent Calvet (the referee), Katie Carman, Meltem Daysal, Joost Driessen, Thijs van der Heijden, Luigi Iovino, Frank de Jong, Ralph Koijen, Bertrand Melenberg, Olivia Mitchell, Theo Nijman, Paolo Porchia, Lisanne Sanders, Kent Smetters, Peter Snoeren, Arthur van Soest, Stefan Trautmann, Raman Uppal, Bas Werker, and seminar participants at the 2012 American Economic Association, BI Norwegian School of Management, Bocconi University, Catolica Lisbon, Copenhagen Business School, Erasmus University, IE University, Maastricht University, Melbourne University, Stockholm School of Economics, Tilburg Institute for Behavioral Economics Research conference, Tilburg Center of Finance conference, Tilburg University, University of Geneva, and Vrije Universiteit Amsterdam for helpful comments and suggestions. Part of this research was conducted while I was visiting the University of Pennsylvania, and I am grateful for their hospitality. I acknowledge financial support by All Pensions Group.



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