Absolute Wealth Research Articles

A Very Simple Goals - and Risk-Based Asset Pricing Model (or Asset Pricing with Heterogeneous Investors)

Prof, Andre Perold has shown how the Capital Asset Pricing Model (with implications for asset pricing and risk-adjusted performance) can be derived from maximizing the Sharpe ratio as opposed to the traditional approach of assuming that investors maximize the utility of wealth. More recently, Goals-based Investing (GBI) is becoming the norm for investors and Prof. Robert Merton has suggested that theory needs to accommodate the fact that investors maximize relative (wealth divided by the present value of the goal) and not absolute wealth. Individuals save for a range of goals (e.g., retirement, a child’s college expenses) and each has a unique set of cash flows. The paper first argues for the creation of a new class of relative risk-free fixed income securities for each goal as proposed for a number of countries by Prof. Merton. These instruments will typically be interest-only real bonds (linked to the appropriate inflation index), with a forward start date, and pay coupons for the period required for the respective goal. The second contribution of this paper is to use the Perold approach and show that with two such goals/instruments and the traditional risk-free asset, all risky assets can be priced and optimal asset allocation recommendations derived, without requiring a formal utility function, risk aversion parameter or market portfolio. All that is needed is the assumption that investors maximize risk-adjusted returns relative to the goal-replicating asset and specify risk goals much like traditional investors would specify. The asset pricing model is derived from the simple idea that a relatively risk-free asset for one goal is a risky asset for another, and hence these two assets, plus the absolute risk-free rate allow us to triangulate to establish returns for all other assets. This approach also lends itself easily to an asset pricing model with heterogeneous investors and effective risk-adjusted performance measures.

The growth of relative wealth and the Kelly criterion

We propose an evolutionary framework for optimal portfolio growth theory in which investors subject to environmental pressures allocate their wealth between two assets. By considering both absolute wealth and relative wealth between investors, we show that different investor behaviors survive in different environments. When investors maximize their relative wealth, the Kelly criterion is optimal only under certain conditions, which are identified. The initial relative wealth plays a critical role in determining the deviation of optimal behavior from the Kelly criterion regardless of whether the investor is myopic across a single time period or maximizing wealth over an infinite horizon. We relate these results to population genetics, and discuss testable consequences of these findings using experimental evolution.

Natural Foundations for Management of Balanced Economic Development. Part II. Components of Capital and Prospects of Their Modernization

The attempt of M. Rudenko to build an innovative model of economic balance, based, from ontological perspective, on the principles of even and uneven numbers is analyzed. The thesis that conscious management of balanced economic development in the long run, keeping the balance in economic management in particular, needs to be assured in the industries generating absolute wealth and producing relative wealth is discussed. The components of absolute capital and relative capital are highlighted. It is demonstrated that the fundamental natural principle of economic management is keeping with the energy conservation law, within consideration for the energy distinction between the living and the non-living. This fundamental scientific law is central in sustaining the economic balance and economic development in the long run.

Positional preferences and efficient capital accumulation when households exhibit a preference for wealth

We study the impact of positional preferences—with respect to wealth in addition to consumption—on endogenous growth, welfare, and corrective taxation. We consider first an AK model, and then introduce public capital. Labour supply is exogenous. We find analytically that the presence of wealth positionality always causes distortions (although a preference for absolute wealth by itself is non-distortionary). Consumption positionality introduces a distortion only if wealth is an argument in the utility function and the marginal degree of positionality in wealth does not match that of consumption. Two corrective tax instruments, a consumption or an income tax, are required for internalization of externalities in an AK set-up; the optimal choice of public investment is an additional instrument when public capital is introduced. Numerical simulations—pointing towards high corrective tax rates and their strong impact on growth and welfare—complement the theoretical analysis.

The global concentration of wealth

This paper compares changes in relative and absolute wealth concentrations to establish whether both processes have followed similar trajectories. The findings indicate that while the relative wealth concentration level has increased in recent times, it is not extraordinarily high from a historical perspective. In contrast, the absolute wealth concentration level is most likely higher than has ever previously occurred, due to the growth of per capita wealth holdings and the population size of high net worth individuals (HNWIs). The available data also suggest that HNWIs recovered very quickly from the losses that they experienced in the financial crisis of 2008. As a result, HNWIs’ wealth holdings in 2013 were at least 30% higher than they were in 2007. The post-crisis recovery of billionaires was even stronger, with their 2014 net wealth holdings more than 85% higher than 2007 levels.

Risk taking after absolute and relative wealth changes: The role of reference point adaptation

We conducted an experiment to compare subjects’ attitudes toward risk before and after they experienced wealth changes induced by a real-effort task. We identified and estimated the subjects’ levels of reference point adaptation to absolute and relative wealth changes. We found that after experiencing a larger loss than others, the subjects did not completely adapt their reference points to the absolute wealth loss and the relative negative wealth gap, and thus significantly increased their risk-taking behavior. However, the subjects also did not adjust their attitudes toward risk after experiencing a smaller loss than others, a smaller gain than others, or a larger gain than others. This may be because they promptly adapted to wealth changes or because they did not adapt to wealth changes but the effects of absolute and relative wealth changes mostly offset each other.

How Resource Endowment Affects Institution and Development: A Theoretical Analysis

In this essay, we set out to show that the preference of political leaders for the maximization of relative share of social wealth, not absolute wealth, creates an institutional structure inimical to the evolution of developmental state in resource-rich LDCs countries, particularly Sub-Saharan Africa. This institutional matrix contrived by political leadership is responsible for the under-development of entrepreneurship and the sub-optimal provision of public goods. The glue that holds this inefficient institutional structure together is natural resource endowment. Greater level of endowments leads to weaker institutional structure and lower level social welfare.

The effect of household poverty on tuberculosis.

We analysed national TB prevalence surveys from eight countries individually and in pooled multicountry models. Socio-economic level (SEL) was measured in terms of both relative household position and absolute wealth. The outcome of interest was whether or not an individual had TB disease. Logistic regression models were used to control for putative risk factors for TB disease such as age, sex and previous treatment history. Overall, a strong and consistent association between household SEL and individual TB disease was not found. Significant results were found in four individual country models, with the lowest socio-economic quintile being associated with higher TB risk in Mongolia, Myanmar, Tanzania and Viet Nam. TB prevalence surveys are designed to assess prevalence of disease and, due to the small numbers of cases usually detected, may not be the most efficient means of investigating TB risk factors. Different designs are needed, including measuring the SEL of individuals in nested case-control studies within TB prevalence surveys or among TB patients seeking treatment in health care facilities.

Social inequalities in adult oral health in 40 low- and middle-income countries

This study evaluated social inequalities in adult oral health across several low- and middle-income countries. We used data from 40 countries that participated in the World Health Surveys. Participants' socio-economic position was assessed using the wealth index. Oral health was assessed using two perceived measures, namely total tooth loss and whether they had any problems with their mouth and/or teeth during the last 12 months (perceived needs). Absolute and relative wealth inequalities in oral health were measured using the slope index of inequality (SII) and the relative index of inequality (RII), respectively, after adjusting for participants' sex, age and education. There were wealth inequalities in total tooth loss and perceived needs in most countries. However, significant monotonic gradients were found in 21 countries for total tooth loss and in 18 countries for perceived needs. Two distinctive patterns of social inequality in oral health were found across countries using the RII and the SII. For total tooth loss, pro-rich inequality was found in 25 countries (significant RII/SII in eight countries) and pro-poor inequality was found in 15 (significant RII/SII in three countries). For perceived needs, pro-poor inequality was found in 26 countries (significant RII/SII in six countries) and pro-rich inequality was found in 14 (significant RII/SII in five countries). The well-documented social gradient in adult oral health favouring the rich was not present in all low- and middle-income countries. Pro-poor inequalities in total tooth loss, and particularly in perceived dental-treatment needs, were observed in some countries.

Wealth Mobility of Families Raising Children in the Twenty-First Century

Wealth inequality between the top and bottom deciles has grown over the last 20 years (Piketty and Zucman in Wealth and inheritance in the long run, Centre for Economic Policy Research, London, 2014), as has the racial wealth gap (Shapiro et al. in The roots of the widening racial wealth gap: explaining the black–white economic divide. Institute on Assets and Social Policy, Brandeis University, Waltham, 2013. http://iasp.brandeis.edu/pdfs/Author/shapiro-thomas-m/racialwealthgapbrief.pdf ). Within these broad trends of inequality, some families are able to get ahead and grow their wealth, while others are not. Yet we do not understand well the critical variables that increase the likelihood of wealth mobility across the life course—within the same generation. This paper addresses this gap and investigates the following questions: What accounts for intra-generational relative and absolute wealth mobility for families with children in the first decade of the twenty-first century? And how does it differ by race? The paper draws on two longitudinal data sets—the Panel Study of Income Dynamics household survey data matched with neighborhood-level US Census data (1999–2011), and the IASP Leveraging Mobility (LM) study (1998–2011). Applying an integrated mixed methods design, analyses are conducted in three stages: (1) A grounded theory analytic approach of the LM data determines key variables of wealth mobility: homeownership, income, employment characteristics, extended family wealth, negative life events, and neighborhood factors; (2) regression analyses test these indicators for absolute and relative wealth mobility; and (3) recontextualization through further analyses of LM data deepen the regression results by illustrating the pathways of significant wealth mobility predictors. Results reveal that increasing family income, larger family transfers, consistent long-term homeownership, and in some cases white-collar occupations increase the likelihood of upward relative wealth mobility. Negative life events, higher rates of neighborhood poverty, and black race are negatively correlated with the amount of wealth growth. These key drivers of wealth mobility highlight the need for targeted policies that reinforce and expand opportunities for all families to build wealth over the life course.

The Role of Bequests in Shaping Wealth Inequality: Evidence from Danish Wealth Records

Using Danish administrative data, we estimate the impact of bequests on the level and inequality of wealth. We compare the distributions of wealth over time of people whose parent died and those whose parent did not. Bequests account for 26 percent of the average post-bequest wealth 1-3 years after parental death and significantly affect wealth throughout the distribution. Bequests increase absolute wealth inequality (variance of the distribution censored at the top/bottom 1% increases by 33 percent), but reduce relative inequality (the top 1% share declines by 6 percentage points from the base of 31 percent).

Market orientalism: cultural economy and the Arab Gulf States

Although the Arab states of the Persian Gulf are leaders in many of the measures of absolute wealth that have traditionally defined success in the global economy, they have had a much harder time becoming accepted in the equally fractured and hierarchal realm of the cultural economy, where practices, signs, and perceptions of propriety matter. Market Orientalism examines how emerging markets are imagined as cultural economic spaces--spaces that are assembled, ranked, desired, and sometimes punished in ways built on earlier forms of dealing with backward economies and peoples. Such imaginations not only impact investment and guide policy, but also create stories of economic value that separate us from them. While market Orientalism functions anywhere that questions of deserved wealth come down to cultural/economic differences between places, Smith focuses on the Arab states of the Gulf. By combining field research with extensive analysis of news archives concerning the cultural economies of the Gulf states, Market Orientalism addresses important motivations for economic relations and provides a framework to analyze how prejudice, fashion, taste, and waste are vital to both narrow and widespread forms of economic activity.

Статусна икономика, институционален дизайн и икономическа политика

This article systemizes the newest research results in the contemporary field of the economic analysis of social status related to the formation of effective institutions and economic policies. The psychological effect of adaptation to the current consumption levels and the prevailing importance of relative to absolute wealth reveal the possibility to explain and forecast human behavior in a rationalistic economic perspective in situations that are usually studied in sociology. Taking into account the effects of the competition for status allows a more thorough and realistic analysis of the forms of socioeconomic organization, the implications of planned economic policies and the role of existing institutional structures for the subjective wellbeing of a society’s members.

Estimating the absolute wealth of households.

ObjectiveTo estimate the absolute wealth of households using data from demographic and health surveys.MethodsWe developed a new metric, the absolute wealth estimate, based on the rank of each surveyed household according to its material assets and the assumed shape of the distribution of wealth among surveyed households. Using data from 156 demographic and health surveys in 66 countries, we calculated absolute wealth estimates for households. We validated the method by comparing the proportion of households defined as poor using our estimates with published World Bank poverty headcounts. We also compared the accuracy of absolute versus relative wealth estimates for the prediction of anthropometric measures.FindingsThe median absolute wealth estimates of 1 403 186 households were 2056 international dollars per capita (interquartile range: 723–6103). The proportion of poor households based on absolute wealth estimates were strongly correlated with World Bank estimates of populations living on less than 2.00 United States dollars per capita per day (R2 = 0.84). Absolute wealth estimates were better predictors of anthropometric measures than relative wealth indexes.ConclusionAbsolute wealth estimates provide new opportunities for comparative research to assess the effects of economic resources on health and human capital, as well as the long-term health consequences of economic change and inequality.

Traditional Wealth, Modern Goods, and Demographic Behavior in Rural Senegal

Summary The study investigates the relationships of demographic indicators (fertility, mortality, marriage, education) with modern and traditional wealth in rural Senegal. Data were based on rural households interviewed in the 2011 DHS survey. An Absolute Wealth Index was computed from a list of 15 modern goods. A Traditional Wealth Index was computed from data on land and livestock per capita. Modern wealth was always associated with modern demographic behavior (lower fertility, lower mortality, higher age at marriage, higher level of education), whereas traditional wealth was not associated with fertility and mortality, and was negatively associated with marriage and education.

Associations Between Orphan and Vulnerable Child Caregiving, Household Wealth Disparities, and Women's Overweight Status in Three Southern African Countries Participating in Demographic Health Surveys.

This study examines whether orphan and vulnerable children (OVC) primary caregivers are facing absolute household wealth (AWI) disparities, the association between AWI and women's overweight status, and the modifying role of OVC primary caregiving status on this relationship. Demographic Health Surveys data (2006-2007) from 20 to 49 year old women in Namibia (n = 6,305), Swaziland (n = 2,786), and Zambia (n = 4,389) were analyzed using weighted marginal means and logistic regressions. OVC primary caregivers in Namibia and Swaziland had a lower mean AWI than other women in the same country. In Zambia, OVC primary caregivers had a lower mean AWI score than non-primary caregivers living with an OVC but a higher mean AWI score than non-OVC primary caregivers. In Swaziland and Zambia, even small increases in household wealth were associated with higher odds for being overweight regardless of women's caregiving status. Only in Namibia, OVC primary caregiving modified the effect of the previous association. Among Namibian OVC primary caregivers, women who had at least medium household wealth (4 or more AWI items) were more likely to be overweight than their poorest counterparts (0 or 1 AWI items). OVC primary caregivers are facing household wealth disparities as compared to other women from their communities. Future studies/interventions should consider using population-based approaches to reach women from every household wealth level to curb overweight in Swaziland and Zambia and to focus on specific household wealth characteristics that are associated with OVC primary caregivers' overweight status in Namibia.

The effects of household wealth on HIV prevalence in Manicaland, Zimbabwe – a prospective household census and population‐based open cohort study

IntroductionIntensified poverty arising from economic decline and crisis may have contributed to reductions in HIV prevalence in Zimbabwe.ObjectivesTo assess the impact of the economic decline on household wealth and prevalent HIV infection using data from a population-based open cohort.MethodsHousehold wealth was estimated using data from a prospective household census in Manicaland Province (1998 to 2011). Temporal trends in summed asset ownership indices for sellable, non-sellable and all assets combined were compared for households in four socio-economic strata (small towns, agricultural estates, roadside settlements and subsistence farming areas). Multivariate logistic random-effects models were used to measure differences in individual-level associations between prevalent HIV infection and place of residence, absolute wealth group and occupation.ResultsHousehold mean asset scores remained similar at around 0.37 (on a scale of 0 to 1) up to 2007 but decreased to below 0.35 thereafter. Sellable assets fell substantially from 2004 while non-sellable assets continued increasing until 2008. Small-town households had the highest wealth scores but the gap to other locations decreased over time, especially for sellable assets. Concurrently, adult HIV prevalence fell from 22.3 to 14.3%. HIV prevalence was highest in better-off locations (small towns) but differed little by household wealth or occupation. Initially, HIV prevalence was elevated in women from poorer households and lower in men in professional occupations. However, most recently (2009 to 2011), men and women in the poorest households had lower HIV prevalence and men in professional occupations had similar prevalence to unemployed men.ConclusionsThe economic crisis drove more households into extreme poverty. However, HIV prevalence fell in all socio-economic locations and sub-groups, and there was limited evidence that increased poverty contributed to HIV prevalence decline.

Bondage in Egypt: Slavery in Southern Illinois by Darrel Dexter (review)

Reviewed by: Bondage in Egypt: Slavery in Southern Illinois by Darrel Dexter Matthew E. Stanley Bondage in Egypt: Slavery in Southern Illinois. Darrel Dexter. Cape Girardeau, MO: Center for Regional History, 2011. ISBN 978-1-890551-00-1, 747 pp., paper, $17.00. Recent studies of slavery in Kentucky and Missouri have enhanced our understanding of slavery’s variability and underscored the importance of the institution’s geography and borders. Yet slavery was not relegated to the south bank of the Ohio River. Indeed, slavery was still practiced in Illinois when Abraham Lincoln moved to the “free state” in 1830. Lincoln’s antebellum Illinois was a “quasi slave state,” according to Darrel Dexter, whose new book asserts that both de facto and de jure forms of chattel slavery existed in the impending “Land of Lincoln” between 1720 and 1865 (15). Dexter, a high school history teacher in Cairo, Illinois, [End Page 462] utilizes voluminous research to provide a thorough account of slavery in southern Illinois during the periods of French, English, and American rule. In doing so, and in challenging popular conceptions of North and South, he adds dimension to the story of race and slavery, regionalism, and the coming of the Civil War. Slavery existed in Illinois for well over a century, dating back to at least 1720 (and legally recognized under the French Code Noir of 1724). Although both the Northwest Ordinance of 1787 and the state’s 1818 constitution outlawed slavery in Illinois, the law was not binding to French inhabitants and other whites who moved there before that date. Whites in Little Egypt—the state’s southern region, between the Ohio and Mississippi rivers—practiced bondage intermittently, as county and state officials ignored or made exceptions to state law. As time passed, however, and politics and demography changed, Illinoisans became more concerned with how best to keep blacks out of Illinois than with retaining the semblances of slavery, culminating with the state’s infamous exclusion law of 1853. By the Civil War, Illinois was mostly antislavery and vehemently anti-black, as Leon Litwack and Eugene Berwanger have argued. Dexter claims that Illinoisans practiced five types of term bondage. Indentured servitude, a form of “voluntary” servitude, was legal until 1848. Registered servants, typically those under the age of eighteen who worked in “apprenticeships,” existed in Illinois until 1836. The leasing of slaves was yet another form of antebellum slavery. So many Kentucky slaves were “hired out” to salt mines in Gallatin County, in the south-eastern part of the state, that it often had a greater slave population than some counties in formal slave states. The imprisonment and enslavement of runaway slaves and free blacks was also common in the “free” states along slavery’s border (so common that every county in southern Illinois had slave auctions on the courthouse steps until the Fugitive Slave Law of 1850). The final form of slavery, practiced until 1865, was a locally tailored convict lease system that involved the arbitrary arrest, imprisonment, and “auctioning off” of free blacks who could not pay their fines or court costs. Dexter argues that these five forms of slavery made Illinois a “quasi slave state” before the Civil War. To use Ira Berlin’s paradigm, early Illinois was a society with slaves, not a slave society—Dexter does not overplay his hand. Indeed, the state’s commitment to slavery never approached that of even Delaware, and Illinois’s Union loyalty during and after the Civil War reflected the extent of its commitment to slavery. Yet, as Dexter admits, southern Illinois was not “the North” as it is traditionally understood. Unlike Joanne Pope Melish does in her examination of slavery in the Northeast, however, Dexter hardly broaches whether or not Illinoisans intentionally deleted their slaveholding past. One wishes he (or some other scholar) had pursued more fully such fascinating memory questions and cultural omissions. [End Page 463] Yet Dexter draws from an impressive array of sources, notably county records and census data, to support the important claims he does make. Bondage in Egypt also includes several helpful maps and appendixes featuring an absolute wealth of slave and census data and election returns. As such, Dexter...

Household wealth trends in the United States, 1983-2010

This study investigates wealth trends from 1983 to 2010. The most telling finding is that median wealth plummeted over the years 2007-10 by 47 per cent. The inequality of net worth, after almost two decades of little movement, was up sharply between 2007 and 2010. Relative indebtedness continued to expand during the late 2000s for the middle class, though the proximate causes were declining net worth and income, rather than an increase in absolute indebtedness. The sharp fall in median net worth and the rise in its inequality from 2007 to 2010 are traceable to the high leverage of middle-class families and the high share of homes in their portfolio. The racial and ethnic disparity in wealth holdings, after remaining more or less stable from 1983 to 2007, widened considerably between 2007 and 2010. Hispanics, in particular, got hammered by the Great Recession in terms of net worth and net equity in their homes. Households under age 45 also got pummelled by the Great Recession, as their relative and absolute wealth declined sharply from 2007 to 2010.

The Relative Asset Pricing Model: The Third Dimension

The Capital Asset Pricing Model (CAPM) has been the backbone of asset market finance even though many academic studies have revealed its limitations, both theoretical and empirical. This paper argues that including liability or benchmark considerations in investment decisions may provide a credible explanation for some of the limitations. In effect, the CAPM is an “absolute wealth”-centric model, driven by the assumption that investors derive utility from absolute wealth. In reality, investors first make investment decisions to ensure sufficient assets to meet obligations such as future pension payment or future consumption (i.e., liabilities) and focus on relative wealth. Thereafter, many investors hire external managers and evaluate them on performance relative to assigned benchmarks. Interestingly, existing robust literatures on, and product offerings for, “liability driven investing”, have not led to a shift in academic theories of asset pricing to reflect the liability perspective. After all, if asset owners choose investments to service liabilities (proxied by benchmarks), it is expected that liabilities or these benchmark proxies will impact asset prices. Therefore, a shift from an “absolute wealth”-centric to a “liability-centric” or “relative wealth” perspective will create a Relative Asset Pricing Model (RAPM), with the CAPM as a very specialized case of this model. Hence, by examining how liabilities are proxied in practice, the many tests that found the need for additional factors to explain asset behaviormight now be rationalized and explained. In this vein, even some behavioral criticisms leveled at CAPM can fit under this liability-centric CAPM-like paradigm. Finally, the asset allocation and portfolio rebalancing implications of this model may better explain some of the risky asset return characteristics such as momentum observed in the market. Therefore, if future research is directed to this compelling liability-centric facet embedded in practitioner behavior and explores this new dimension, RAPM may complement traditional CAPM, and help investors and academicians alike to develop better approaches to asset allocation, rebalancing as well as to asset pricing.