The Ulysses option: Smoking and delegation in individual investor decisions

Abstract

• Data of 19,336 brokerage clients with security transactions and account bookings. • Identification of smokers as empirical proxy of self-control failure. • Smokers are more likely to seek and follow financial advice. • Advice lowers smokers’ turnover while increasing diversification. • Advice works as an effective commitment for investors with low self-control. Are smokers more likely to seek and follow financial advice? We build on literature which shows that investors who smoke have self-control issues and trade impulsively. We empirically measure self-control failures by identifying cigarette addiction in a sample of German brokerage clients and show that smokers are more likely to delegate their decisions to financial advisors which work like a commitment device. Potential endogeneity issues and self-selection are addressed by using propensity score matching. Despite advisor incentives, such commitments work successfully in lowering overtrading, improving investment biases and increasing performance of low self-control investors.