Abstract

Abstract To explain the empirically observed heterogeneity in household portfolio and wealth dynamics, we develop a general-equilibrium framework with multiple risky assets along with households that differ in their confidence about the return pro- cess for the risky assets. Consistent with recent empirical evidence, less-confident households overinvest in safe assets, hold underdiversified portfolios concentrated in familiar assets, are trend chasers, and earn lower absolute and risk-adjusted investment returns. More confident investors hold riskier positions and exhibit superior market-timing abilities. The model also explains why this investment behavior, despite Bayesian learning and optimal decision, persists for long periods, thereby exacerbating wealth inequality.