Windfall Gains and Stock Market Participation

Briggs, Joseph; Cesarini, David; Lindqvist, Erik; Östling, Robert

doi:10.3386/w21673

Cited by 45 publications

(36 citation statements)

References 12 publications

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“…The correlation coefficients between levels of cash-on-hand, permanent income, and savings with portfolio shares are around 0.2, in line with the value I find in SCF data of 0.26. Moreover, Wachter and Yogo (2010) and Briggs et al (2015) provided evidence that within households portfolio shares fall in transitory income shocks, which is also predicted in my model as can be seen in Figure 8. Furthermore, because the agent is only subject to labor-income risk that determines his first-period endowment in the first period of his life-and his willingness to take on stock-market risk increases in the stock-market risk incorporated in his expectations about consumption-his portfolio share is especially low in the first few periods of his life.…”

Section: Discussion Of Estimation Resultssupporting

confidence: 80%

“…Abel, Eberly, and Panageas (2013) and Alvarez, Guiso, and Lippi (2012) assumed transaction, information, or observation costs to generate investor inattention in continuous- Michaela Pagel: mpagel@columbia.edu time portfolio-consumption models (as in Duffie and Sun (1990)). 2 However, in life-cycle models, realistically calibrated transaction costs under standard preferences imply too high portfolio shares, little non-participation, and large wealth accumulation (as shown in Briggs, Cesarini, Lindqvist, and Oestling (2015)). Additionally, transaction and information costs do not explain expensive delegated portfolio management, time diversification, or mental accounting.…”

Section: Introductionmentioning

confidence: 99%

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A News-Utility Theory for Inattention and Delegation in Portfolio Choice

Pagel

2018

Econometrica

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Recent evidence suggests that investors are inattentive to their portfolios and hire expensive portfolio managers. This paper develops a life‐cycle portfolio‐choice model in which the investor experiences loss‐averse utility over news and can ignore his portfolio. In such a model, the investor prefers to ignore and not rebalance his portfolio most of the time because he dislikes bad news more than he likes good news such that expected news causes a first‐order decrease in utility. Consequently, the investor has a first‐order willingness to pay a portfolio manager who rebalances actively on his behalf. Moreover, the investor can diversify over time and his consumption aligns with predictions of mental accounting. I structurally estimate the preference parameters by matching stock shares and stock‐market non‐participation over the life cycle. My parameter estimates are in line with the literature, generate reasonable intervals of inattention, and simultaneously explain consumption and wealth accumulation over the life cycle. Here, it matters that news utility preserves first‐order risk aversion even in the presence of stochastic labor income, which also causes stock shares to rise in wealth.

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Section: Discussion Of Estimation Resultssupporting

confidence: 80%

Section: Introductionmentioning

confidence: 99%

A News-Utility Theory for Inattention and Delegation in Portfolio Choice

Pagel

2018

Econometrica

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“…75 If I follow the calculations in Gelman and Carlin (2014), assuming that the estimate of 0.39 in Cesarini et al (2016) represents the true effect size, the power of my study to detect a similar effect size at the 95% level (conditional on my estimate being statistically significant) is 5.5%. 76 The fact that studies using lottery winnings and inheritances tend to deliver similar results with respect to other outcomes, such as labor supply (Imbens et al 2001;Cesarini et al 2015;Bø et al 2016;Elinder et al 2012) and investment decisions (Briggs et al 2015;Andersen and Nielsen 2011), suggests that it is unlikely that the discrepancy in findings is a consequence of people treating lottery winnings and inheritances differently, as suggested by Winkelmann et al (2010).…”

Section: Concluding Discussionmentioning

confidence: 64%

Health responses to a wealth shock: evidence from a Swedish tax reform

Erixson

2017

J Popul Econ

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This paper makes two contributions to the literature on the effects of wealth on health. First, it deals with reverse causality and omitted variable bias by exploiting exogenous variation in inherited wealth generated by the repeal of the Swedish inheritance tax. Second, it analyzes responses in health outcomes through the use of administrative registers. The results show that increased wealth has limited short to medium run impacts on objective adult health. This is in line with what has previously been reported in the literature.

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Section: Stock Market Non-participationmentioning

confidence: 81%

“…The fact that participation rises with wealth is consistent with the importance of fixed costs. Briggs et al (2015) find that winning $150,000 in a Swedish lottery increases stock market participation by 12 percentage points among those not previously participating.However, participation is not universal even among very wealthy households. Within the top 5% of the wealth distribution, 6% of U.S. households and more than 65% of Austrian, Spanish, and Greek households hold no stocks (Guiso and Sodini, 2013).…”

mentioning

confidence: 81%

Behavioral Household Finance

Beshears

Choi

Laibson

et al. 2018

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This chapter provides an overview of household finance. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: consumption and savings, borrowing, payments, asset allocation, and insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: education and information, peer effects and social influence, product design, advice and disclosure, choice architecture, and interventions that directly target prices or quantities. This chapter is divided into two parts, each of which is further divided into several sections. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing both extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: (I) consumption and savings, (II) borrowing, (III) payments, (IV) asset allocation, and (V) insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: (VI) education and information, (VII) peer effects and social influence, (VIII) product design, (IX) advice and disclosure, (X) choice architecture, and (XI) interventions that directly target prices or quantities. The final section of the paper (XII) concludes. John BeshearsWe offer broad coverage of the household finance literature, but we limit the scope of our discussion along some dimensions. We focus on the U.S. institutional context and on empirical work based on U.S. data, although we do bring evidence from other wealthy countries to bear when germane and occasionally reference evidence from developing countries. We address household asset allocation but do not draw out its implications for asset pricing, which are covered by the asset pricing chapter in this handbook. Although household decisions regarding health care are relevant to household finance, we largely omit this literature from our chapter because it is covered in depth in the chapter on behavioral health economics. Finally, there is some overlap between our section on financial product design and the chapter on behavioral industrial organization; we refer readers to that chapter for related material on that topic. Part 1: Facts I. Consumption and SavingsBeginning with the seminal work of Modigliani and Brumberg (1954) and Friedman (1957), economists have embraced the view that households choose to save and borrow to smooth consumption over the lifecycle. Intuitively, if agents have concave utility functions over consumption, then they should spread consumption across time to optimally...

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Windfall Gains and Stock Market Participation

Cited by 45 publications

References 12 publications

A News-Utility Theory for Inattention and Delegation in Portfolio Choice

A News-Utility Theory for Inattention and Delegation in Portfolio Choice

Health responses to a wealth shock: evidence from a Swedish tax reform

Behavioral Household Finance

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