Household Investment Behavior Research Articles

The Display of Information and Household Investment Behavior

I exploit a natural experiment to show that household investment decisions depend on the manner in which information is displayed. Israeli retirement funds were prohibited from displaying returns for periods shorter than twelve months. In this setting, the information displayed was altered but the accessible information remained the same. Using differences-in-differences design, I find that this change caused reduction in fund flow sensitivity to past returns, decline in trade volume, and increased asset allocation toward riskier funds. These results are consistent with models of limited attention and myopic loss aversion, and have important implications for households' accumulated wealth at retirement.

New Evidence of Household Investment Behavior

New Evidence of Household Investment Behavior

Immigrant Household Investment Behavior and Country of Origin: A Study of Immigrants to the United States

Immigrant Household Investment Behavior and Country of Origin: A Study of Immigrants to the United States

Financial literacy, information flows, and caste affiliation: Empirical evidence from India

This paper empirically investigates the relevance of social interaction and caste affiliation for individual awareness of financial instruments and investment behavior of households in India. The results of our empirical analysis, which is based on a large scale survey on saving patterns of Indians, suggest a positive relationship between financial literacy and social interaction. However, especially backward caste people living in regions with a large fraction of backward castes have a lower probability of being aware of various financial instruments. In contrast, we find only weak empirical evidence for a direct effect of caste affiliation and social interaction on investment behavior.

Explaining Households’ Investment Behavior

Building on a framework of heterogeneous uncertainty across the population, this paper provides a unified theoretical explanation for several salient features of household investment behavior: First, a fraction of households will choose not to participate in the stock market, with poorer households less likely to participate. Second, among the part of the population that does choose to invest, wealthier households choose to invest a larger share of their wealth into risky assets than less wealthy households. The model suggests that as aggregate wealth rises, we should see higher levels of stock market participation. We build on a CARA-normal framework with uncertainty-averse investors and link the level of uncertainty to investor wealth, given the empirical evidence that wealthier investors tend to acquire more costly information. The model is able to reconcile previous conflicting findings: our model shows that the intuition of models with exogenous participation restrictions - limited stock market participation leads to a higher equity premium - can indeed be retained when the participation decision is endogenized.

Financial Advice and Individual Investors' Portfolios

This paper is an early response to Campbell's (2006) call to analyze the role of financial intermediaries in household finance. We first sketch a basic theory of financial advice that proceeds from cognitive errors and costly information acquisition. We then derive hypotheses about honest and deceptive financial advice and test them on a unique administrative dataset from a large German retail bank. We find that the clients advised are older, wealthier, more risk averse and more likely to be female. Financial advice enhances portfolio diversification, makes investor portfolios more congruent with predefined model portfolios, and increases investors' fee expenses. Our empirical evidence is broadly in line with honest financial advice. A general implication of the paper is that financial advisory service has a significant impact on household investment behavior and that it deserves more attention in future research on household finance.

Savings, Portfolio Choice, and Retirement Expectations

Studying household investment behavior is essential for understanding the full consequences of old age social security benefits. Using data from six waves of the Health and Retirement Study, we analyze the dynamics of portfolio composition before respondents start claiming social security benefits. We consider ownership as well as amounts held of several types of assets and debts. Using panel data censored regression models, portfolio adjustment is explained on the basis of demographics like gender, race, and year of birth, education level, household income, and perceived social security entitlements. We find that expectations of old age social security benefits have little effect on portfolio decisions, although there is some evidence that higher expected social security benefits lead to more risky financial investments, particularly in IRAs.

Microfinance Programs in Uganda: An Analysis of Household Participation and Investment Behavior

This paper identifies a model of low-income household participation in microfinance credit programs and the effects on investment behavior from repeated access to these institutions using evidence from household survey data. The primary focus is on changes in household investment behavior, not the assessment of changes in welfare per se. The results for a representative sample of households in Uganda indicate that the most significant factors influencing the decision of a household to participate are proximity to microfinance institutions (MFIs), dual sources of household income, and income stability. This paper shows that once the decision has been made to participate, repeated use of the financial services of MFIs has a positive impact on household investment in health, education, and consumption. Repeated access to credit from an MFI significantly raises the likelihood that a household will invest more in nutrition, health and education, ceteris paribus. Through repeated access to credit, income and wealth effects are generated that may reduce vulnerability to poverty. Keywords: microfinance credit, household investment and consumption, participation Eastern African Journal of Rural Development

Dual labor market hypothesis and long-run income distribution

We construct a dynamic model of dual labor market, incorporating firm investment behavior and household investment behavior on education. Education enhances the trainability of individuals and thus provides qualifications for entry into the primary market. Two specifications of the model, differing in the nature of the new entrants' market, are presented; one admitting competitive adjustment in the scarcity premium of qualified entrants, while the other, a generalization of Thurow's job competition model, allocates employment through rationing. We obtain sharply different long-run determinants of income distribution between these alternative models. The result extends and qualifies existing interpretations on the schooling paradox observed in the U.S.