Wealth Accumulation Process Research Articles

Wealth of Immigrant and Native-Born Americans

This study hypothesizes nativity differences in the process of wealth accumulation with regards to accumulation rates, dissaving rates, the role of human capital, saving intention for children, and structural barriers to wealth accumulation. Based on an analysis of the 1992 and 1993 panels of the Survey of Income and Program Participation (SIPP), it reports four major findings. First, levels of net worth, life cycle patterns, and wealth components are primarily stratified by national origin and race-ethnicity rather than by nativity. Second, when immigrants’ adult years in the United States are taken into account, the life cycle pattern of wealth of the post-1965 immigrants catches up with that of natives within 22 years of arrival and then overtakes natives. Third, the process of wealth accumulation is similar for immigrants and natives in all but two respects – for immigrants, education is discounted and adult years in the United States matter. Lastly, spatial segregation has a uniform negative effect on wealth for both immigrants and natives.

Are rich people smarter?

We formulate a general stochastic process of wealth accumulation by capital investment and analyze the conditions required to ensure convergence to the empirically observed Pareto wealth distribution. While homogeneous investment talent leads to the Pareto distribution under very general conditions, even a mild degree of differential investment talent results in a non-Pareto wealth distribution. This finding suggests that chance, rather than differential investment talent, is the dominant factor in the process of wealth accumulation by financial investment. Our findings conform with market efficiency and may have implications regarding the origins, the economic significance, and the social desirability of wealth inequality at the high-wealth range.

Overconfidence, Investor Sentiment, and Evolution

We examine the long-run survival of non-rational traders in a dynamic evolutionary model. Specifically, we develop a general population dynamic for a large economy with rational and non-rational traders according to the process of wealth accumulation in asset markets. The dynamic indicates that the growth rate of wealth accumulation drives the evolutionary process in asset markets. This endogenously determined group wealth accumulation process distinguishes our evolutionary model from previous models with exogenous imitation processes. We apply the population dynamic to examine the survival of overconfident traders in a pairwise contest and the survival of noise traders in a playing-the-field contest. We find that neither underconfident nor bearish sentiment can survive. On the other hand, investors with moderate overconfidence or bullish sentiment can survive in the long run. Furthermore, these moderately aggressive investors may dominate the market if fundamental risk in the market is sufficiently large. These findings provide interesting new empirical implications for the survivability of active fund management. Overall, our results lend support to the relevance of the psychology of investors with respect to either overconfidence or sentiment for the study of financial markets.

A wealth accumulation model

Insight into the mechanisms involved in the wealth accumulation process of the various economic agents remains generally partial. Thus, from a didactical point of view, it appears useful to describe, in twenty simple relations, the main stages of this process, by linking as closely as possible « real » variables to financial ones. In the first place, it appears thus necessary to establish equilibrium relations between flows of financial resources and their uses distinguishing national economies’ sectors from the « rest of the world ». In the second place, while keeping with the same distinction, wealth accumulation relations are developed. While remaining very close to the European System of Accounts, it was sometimes deemed useful to shed some light on relations that are considered as useful for a good understanding of the issues at stake. JEL classifications : E20, M41

Le modèle d'accumulation patrimoniale

The Wealth Accumulation Model Insight into the mechanisms involved in the wealth accumulation process of the various economic agents remains generally partial. Thus, from a didactical point of view, it appears useful to describe, in twenty simple relations, the main stages of this process, by linking as closely as possible « real » variables to financial ones. In the first place, it appears thus necessary to establish equilibrium relations between flows of financial resources and their uses distinguishing national economies’ sectors from the « rest of the world ». In the second place, while keeping with the same distinction, wealth accumulation relations are developed. While remaining very close to the European System of Accounts, it was sometimes deemed useful to shed some light on relations that are considered as useful for a good understanding of the issues at stake. JEL classifications : E20, M41

Transfer and Life Cycle Wealth in Japan, 1974-1984

This paper measures, via the cumulation of life cycle saving method, the contribution of transfer to total wealth accumulation among worker households from 1974 to 1984. The findings suggest that under either the Modigliam or Kotlifoff and Summers definitions of transfer wealth, capital accumulation for these households is largely the resule of life cycle saving. This study differs from previous analyses on the topic because of its close application of the two definitions of transfer wealth and by its extensive use of simulation analysis. Accumulated transfer wealth, under either the Modigliam or Kotlifoff and Summers definitions, constitute a small component of total accumulated wealth for worker households from 1974 to 1984. Thus, for most Japanese households (worker households being 59.8 percent of total households), capital accumulanon is a manifestation of life cycle saving. However, since worker households held only approximately half of total household wealth in 1984, it is premature to conclude that life cycle saving dominates the wealth accumulation process in Japan.

The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing

are uniquely determined, and wealth dispersion among individuals or firms is irrelevant. Introducing credit rationing into the Solow model modifies these conclusions. Multiple stationary interest rates and wealth distributions can exist because higher initial rates can be self-reinforcing through higher credit rationing and lower capital accumulation. The wealth accumulation process is ergodic in every steady state, but wealth mobility is lower with higher steady-state interest rates. Aggregate output is higher in steady states with lower interest rates because credit is better allocated. Short-run interest rate or distribution shocks can be self-sustaining and can have long-run effects on output through the induced dynamics of the wealth distribution and credit rationing.

Alternative optimality criteria of portfolio selection based upon threshold stopping rule

AbstractThis paper proposes two types of alternative criteria of optimality for the continuous time portfolio selection problem. The optimality criteria, the so–called Laplace–Stieltjes transform (LST) criteria, are based on the assumption that the financial agent has a target level for the wealth accumulation process. These criteria are closely related to the so–called threshold stopping investment rule. We analytically derive the LST criteria and numerically compare them with the well–known Kelly criterion. It is shown that the portfolio strategies suggested may overcome the problem that the growth portfolio is often overestimated in several investment situations.

Habit dynamics and wealth accumulation fluctuations

This paper explores the possibility that consumption habits are directly affected by investors' wealth histories as unanticipated wealth losses alter perceived financial well-being and force investors to re-evaluate their minimum consumption habit requirements. The response of consumption habits to unexpected investment return changes is assumed to depend upon individual differences in need for cognition and tendency towards risk taking, and these differences lead to sharply contrasting investment strategies which alter the wealth accumulation process. Investors who do not monitor their consumption habits during good times find that they must quickly move out of risky assets during downturns in order to ensure that they can continue to meet their minimum consumption needs. This dynamic trading portfolio insurance behaviour is inherently risky in an economic sense, so these myopic investors must compensate by reducing the risk exposures they choose, thus resulting in a lower rate of wealth accumulation and a utility loss. Investors are better off if they cut back habitual consumption during recessions in order to preserve financial well-being and maintain wealth accumulation rates.

Wealth accumulation process by income class

The paper examines the empirical data on income and wealth in Japan carefully. The preliminary examination suggested the importance of intergenerational wealth transfers not only for high-income earners but also for some low-income earners. A simple model of savings behavior with a bequest motive was applied in order to estimate indirectly the amount of intergenerational wealth transfer by income class. This indirect method was reasonably successful in revealing the relative importance of intergenerational wealth transfers by income class in Japan, where no direct data on intergenerational wealth transfers are available.

A STOCHASTIC SIMULATION OF THE PERSONAL INVESTMENT DECISION*

THE ACCUMULATION of personal wealth is a process that involves two decision elements: choice of the amount to be saved (investment scale) and choice of assets in which savings are to be held (investment mix). Although each of these has received considerable attention in the literature, they are typically treated separately and statically. Portfolio-selection models, for example, normally assume that the amount to be invested is given; time-preference models, at the same time, usually specify a given and certain investment-opportunity schedule. This implies independence of the distributions of scale and mix outcomes over time. It also suggests that personal utility functions should be described separately with respect to time and risk preferences. Separate treatment of relevant determinants provides a limited description of the wealth-accumulation process. This study attempts to conceptualize and construct an integrated decision model, one which accommodates the scale and mix decisions simultaneously and dynamically. The general model proposed consists of a set of algebraic statements describing the financial and personal environment facing an individual investor. Functional relationships to be specified include consumption preference and expected values of salary, rate of return on investment, taxes and the initial wealth position. Any of these can be defined as randomly distributed. The Monte Carlo method is then employed to trace interim and terminal wealth positions over the life cycle of the investor. Successive iteration generates a distribution of wealth positions for each scale-mix combination at each desired observation point over the life cycle. The generalized model described above is flexible, and it can be applied to a number of relevant questions facing individual investors. To cite one example, the wealth effect of alternative life-insurance programs can be evaluated. Timing considerations can also be accommodated; the minimum level of expenditure required to educate one's children may be used to constrain acceptable interim wealth positions. The estimation of return on human investment is another promising area for experimentation, since the costs and benefits of educational and professional activity can be defined as part of the structure of any particular model. For purposes of this study, a hypothetical investor was defined, and a computer program was designed and operated to test the feasibility of the model. Since the assumed environment is not considered to be excessively unrealistic, model outcomes were also subjected to a sensitivity analysis in an attempt to assess the relative significance of each of the decision variables. Salary patterns and consumption propensities were allowed to vary, and the investor was viewed as attempting to maximize wealth within the living standard imposed by his budget constraint. A two-parameter portfolio set was assumed, and parameters were estimated empirically by employing the Sharpe diagonal model. Federal taxes were computed on the basis of existing regulations. The experimental outcomes have relevance, properly speaking, only for the model's hypothetical investor. Nevertheless, some findings have implications of more general in-

Rational Choice and Patterns of Growth

Concluding his excellent survey of recent monetary theory, Harry Johnson [4] suggested that future developments in this field should come from attempts break monetary theory loose from the mould of short-run equilibrium analyses, conducted in abstraction from the process of economic growth and accumulation, and to integrate it with the rapidly developing theoretical literature on economic growth. This paper summarizes an attempt to deal with these issues. Like most theoretical work in rapidly growing fields, it is incomplete and the assumptions on which it is based are relatively crude abstractions. These abstractions, however, allow us to explore certain aspects of the interaction of the real and the monetary phenomena in a model of economic growth in which money, being government noninterest bearing debt, is introduced as an alternative asset to real capital. Most of the recent work in this field 1 has centered on the analysis of the patterns of growth of a monetary economy by postulating alternative plausible saving functions and demand functions for money. What differentiates this product is the fact that, in line with Patinkin's [6] presentation of the neoclassical theory of money, and with the classical Fisherian theory of saving [2], it is based on an explicit analysis of individuals' saving behavior, viewed as a process of wealth accumulation aimed at maximizing some intertemporal utility function. The first part of the paper describes the representative economic unit