The Weight of Gold: Modeling Cultural Preferences in Optimal Portfolio Allocation

Abstract

This thesis studies how a culturally meaningful asset such as gold can enter an optimal portfolio, and which type of portfolio model gives the most convincing explanation for that behavior. The project is motivated by a gap between real household behavior and standard financial models. In many immigrant and culturally rooted households, gold is not viewed only as a speculative asset. It can also function as precautionary savings, family wealth, social status, and a store of value tied to trust, tradition, and financial experience. Standard portfolio theory often leaves little room for that kind of demand. To study this question, we begin with two financial benchmarks, a mean–variance model and a goals-based model, and then extend the goals-based framework so that cultural preference for gold can enter in three different ways. The results show that gold does not enter for the same reason in every model. In the mean–variance benchmark, gold can appear because its lower volatility and diversification value improve the portfolio trade-off. In the goals-based benchmark, gold enters only in narrower cases where it helps raise the probability of reaching a target. Among the cultural extensions, a simple linear preference term becomes too unstable, while threshold and penalty formulations generate more realistic moderate gold demand. The penalty specification performs best overall because it allows a bounded cultural role for gold while preserving a meaningful financial trade-off. A descriptive empirical bridge using the SCF and SIPP datasets supports a moderate and proxy-dependent cultural-demand story rather than either zero shift or extreme gold preference.