Housing Valuation,Wealth Perception,and Homeowners’ Portfolio Composition

This study explores the link between wealth perception from an appreciation of the residential property price and homeowners’ preference toward asset categories pooled by risk. Household survey data for Portugal were used to build shares of low, medium, and high risk assets representing fractions of household’s total wealth. Data showed incomplete household portfolios along with housing capturing the largest share of households’ wealth, in line with the literature on composition puzzles. The findings indicate robust empirical evidence that the rate of housing valuation is an indicator of households’ wealth perception. When the housing price appreciates with respect to its initial cost, households suffer an endowment effect and tend to increase diversity in their portfolio, expanding the holdings of safe deposits as they raise the share of high risk assets.     

Investor happiness

We study investor happiness in a panel survey of brokerage clients at a UK bank. When investors anticipate future happiness, they set their return aspirations according to personal portfolio risk, objectives, investment horizon, confidence, and other individual characteristics. They are accurate in their forecasts, only rarely are investors unhappy with outcomes they predicted they would be happy with, and vice versa. However, determinants of experienced happiness only partially correspond to the ones found for anticipated happiness. In particular, relative performance plays an important role investors do not anticipate. Having outperformed other people contributes to investor happiness, as does active trading success.     

Shared losses reduce sensitivity to risk: A laboratory study of moral hazard

Moral hazards are said to occur when one party makes decisions that have potential negative consequences that will either be fully or partially experienced by another party. The present experiment sought to explore moral hazard in a laboratory setting. Participants made choices between certain and risky rewards. On some trials, participants bore the full brunt of a loss if the risky reward was chosen and lost. On other trials, participants believed losses would be shared with another party creating the opportunity for moral hazard. Our design allowed us to measure whether the presence of a moral hazard influenced participants’ choice behavior and to quantify the magnitude of this influence. Results suggested that participants were more tolerant of risk when they believed losses would be shared with another party compared to choices when all of the loss would be experienced personally. More importantly, concern for the third party losses appeared to exert no influence on choices whatsoever. These results were found when the third party was anonymous (Experiment 1) but also when they met the third party face-to-face (Experiment 2). The relationship between the current results and real-life moral hazards, as well as possible future research directions, is discussed.     

Lebensstile und Wohnstandortwahl

Life style research and various disciplines dealing with regional studies argue that life styles are explanatory relevant for decisions in different behavioral areas, in particular for residential choices. However, the results of previous research are rather mixed. To specify the conditions for the explanatory relevance of life style based preferences for locational choices, this article ties in with a parsimonious decision theoretic model, which has been applied both in the sociology of the city and in life style research. Based on this theoretical framework an empirical study is presented, which tests the explanatory relevance of life styles for residential choices. The study is based on neighborhood survey data from Leipzig, representing a context, in which a strong impact of life styles may be expected. However, even in this context the empirical study shows rather limited explanatory power of life style based preferences for residential choices, whereas household arrangements and economic resource endowments of persons show much more explanatory power.     

The value of being precise

This study investigates how individuals assess imprecise information. We focus on two essential dimensions of decision under uncertainty, outcomes and probabilities, and their respective precision. We believe the precision of information is highly relevant in the investment setting, as reflected in the well-known “home (familiarity) bias”, and the outcome and probability dimensions, separately or jointly, may affect investors’ knowledge of uncertainty and perceived risk of the investment options, and subsequently affect investors’ choices. To test this conjecture, we conducted three experiments. Our results show that 1) participants demonstrate a pattern of preference for precision and aversion of extreme vagueness and associate vagueness with higher perceived risk and lower investment (experiments one and two); 2) participants prefer vague outcome information to vague probability information (experiment two); 3) familiarity indeed positively affects the precision of estimated values, but this association is stronger for the outcome dimension than for probabilities (experiment three). Our results confirm that precision in information, especially in the outcome dimension has an impact on investors’ resource allocation choices.     

Subjective measures of risk aversion, fixed costs, and portfolio choice

The paper investigates risk preferences among different types of individuals. We use several different measures of risk preferences, including questions on choices between uncertain income streams suggested by Barsky, Juster, Kimball, and Shapiro (1997) and a number of ad hoc measures. As in [Barsky et al., 1997] and [Arrondel and Calvo-Pardo, 2002], we first analyze individual variation in the risk aversion measures and explain them by background characteristics (both “objective” characteristics and other subjective measures of risk preference). Next we incorporate the measured risk preferences into a household portfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios and fixed costs. Our results show that a measure based on factor analysis of answers to a number of simple risk preference questions has the most explanatory power. The Barsky et al. (1997) measure has less explanatory power than this “a-theoretical” measure, suggesting that sophisticated measures based on economic theory may exceed the financial capability of respondents. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.     

Short-run adjustments in the family's investment portfolio

American families have been changing the way they allocate their investment resources. These changes have raised questions concerning the types of investment decisions families make. The objective of this research was to gain a better understanding of the types of investment trade-offs households made between financial, physical, and human capital assets. This was done by estimating a short-run stock-adjustment model of family investments using panel data from the early 1970's. From examining the empirical results, it appeared that during this historical period, choices about a husband's human capital investment were generally related to a household's physical and financial asset acquisition. In contrast, choices regarding the wife's human capital investment appeared not to be related to any of the more traditional household investment options. The implications of this study for increasing understanding of current household investment patterns are discussed in the concluding section of the paper.     

Gender differences in risk behavior and the link to household effects and individual wealth

This study examined the differences in risk behavior between men and women using a household survey that captured the risk preferences of two members in a household and recorded wealth at the individual level instead of the usual approach of representing wealth at the household level. After controlling for commonly used explanatory variables, such as gender, education, age, and wealth, household fixed effects explain about 15% of the variation in risk behavior. This highlights the magnitude of household effects in shaping one’s risk behavior. In general, females in the study area are more risk averse than males based on a risk game with real payout. The gender differences disappear when focusing on only the top land owners. However, even in those cases, females consider themselves more risk averse, supporting results from previous studies that link culture and societal norms to the gender differences in risk behavior.     

Household finances and the ‘Big Five’ personality traits

Using data drawn from the British Household Panel Survey, we analyse the relationship between personality traits and financial decision-making focusing on unsecured debt and financial assets. Personality traits are classified according to the ‘Big Five’ taxonomy: openness to experience, conscientiousness, extraversion, agreeableness and neuroticism. We explore personality traits at the individual level and also within couples, specifically the personality traits of the head of household and personality traits averaged across the couple. We find that certain personality traits such as extraversion are generally significantly associated with household finances in terms of the levels of debt and assets held and the correlation is often relatively large. The results also suggest that the magnitude and statistical significance of the association between personality traits and household finances differs across the various types of debt and assets held in the household portfolio.     

Estimating customer utility of energy efficiency standards for refrigerators

A frequent argument against efficiency standards is that they prohibit products that represent optimal choices for customers and thus lead to reduced customer utility. In this paper we propose and test a method to estimate such losses. Conjoint analysis is used to estimate utility functions for individuals that have recently bought a refrigerator. The utility functions are used to calculate the individuals' utility of all the refrigerators available in the market. Revealed utility losses due to non-optimal choices by the customers seem consistent with other data on customer behaviour. The same utility estimates are used to find losses due to energy efficiency standards that remove products from the market. Contrary to previous claims, we find that efficiency standards can lead to increased utility for the average customer. This is possible because customers do not make perfect choices in the first place.     

Subjective measures of household preferences and financial decisions

In intertemporal models of household consumption or portfolio choice, household behaviour depends on, for example, the household's rate of time preference, the rate of risk aversion, and the household's information set. In this paper we use a survey of Dutch households which contains direct subjective information on risk aversion and time preference and on interest in financial matters. We first describe these data and analyze how they relate to household characteristics and household income. We then investigate whether these variables are related to households' financial decisions on home ownership, mortgages and ownership of risky assets. Our results are broadly in accordance with economic theory.     

Mutual-Fund Benchmarking and Market Bubbles: A Behavioral Approach

Dynamics of equity risk premium is not directly measurable on the market. Numerous studies and empirical research analyse its volatility also considering the time span, concluding that the dynamics of equity risk premium over time is inversely proportional to the economic cycle. This study analyses the passive role that, implicitly, would place institutional investors in such a context. In reality, savings management is delegated to a small number of professional operators (institutional investors), as opposed to pure theoretical models in which every person can act directly on the market thus ensuring unlimited price elasticity. Institutional investors should be rational and completely informed so that they can assume an anticyclical position on the market. Thus, supply and demand should quickly smooth over emerging price pressures and avoid price bubbles. We analyse one possible explanation for this situation not to occur, namely, that professionals suffer from operational limits that prevent them from doing their job in the best possible way. Using empirical evidence from the Italian Stock Exchange (Comit Index), we conclude that three factors reduce the freedom of institutional investors to manage their portfolios – the market target size, the fund structure, and the benchmarking – and discuss some implications for each of them.     

Third-party decision-making under risk as a function of prior gains and losses

Humans typically prefer risky options after incurring a financial loss, while generally preferring safer options after a monetary gain. Oftentimes we do not only make decisions for ourselves but also on behalf of others. In the present study we examine how decision-making on behalf of another person can alter risk preference for mixed gambles with moderate probabilities, as a function of prior monetary gains and losses. Furthermore, we test how the extent of accountability for choices and outcome further may impact these effects. To test this, participants performed a series of trials in which they could either gain or lose money depending on a separate, unrelated, task. Immediately following the respective gain or loss, they decided to either play or pass on a mixed gamble that could either double or eliminate their gain or loss. Importantly, participants decided either (1) for themselves, or (2) on behalf of another participant under outcome accountability, or (3) under full accountability (process and outcome). Results revealed increased risk-taking after incurring a loss as compared to a gain for both Self and Other choices. However, this effect was significantly smaller for choices on behalf of others, in particular when accountability was reduced. The reduced impact of gains and losses on risk behavior on behalf of others are discussed in terms of reduced saliency and subjective value for prior gain/loss contexts, and consequently reduced engagement of affective processes.     

Individual investors and risk-taking

During the last decade, a large amount of information has been collected concerning financial markets and financial institutions. Less is known about individual investors. This study relates a specific personality characteristics, locus of control, to portfolio risk as measured by beta; these two concepts are described below. Locus of control and beta are examined in combination with the sex, marital status, age, educational level, asset level and number and value of common stocks held by one group of investors. The relationship between locus of control and beta is also considered.This study is divided into four parts. The first part reviews the capital asset pricing model and the construct “locus of control” as well as previous research relating locus of control to risky decision-making. Then, the data used in this study are discussed. The third section presents the results of this study, and the final part provides a summary.     

Risky choices and emotion-based learning

The paper offers a comprehensive analysis of causes and consequences of the accumulation of emotional experience, measured via skin conductance response, when taking risky choices. A large experimental data set was obtained from a psycho-physiological task conducted with 645 bank customers and financial professionals. With respect to causes, we found that the individual emotional response to gains/losses is trend-dependent and influenced by habituation, as well as by anchoring/framing due to the external layout of risky alternatives. With respect to consequences, we found evidence that the somatic reinforcement experience is able to guide asset picking, but within a long-term strategy. Consequently, selection behaviors were observed in a portfolio mean–variance framework, revealing that somatic markers lead individuals to pursue a long-term ‘psycho-economic’ efficiency that integrates factual information (monetary outcomes) with the implicit subjective experience.     

Marriage and the Allocation of Assets in Women’s Defined Contribution Plans

The goal of this paper is to understand the effect of family decision-making on the investment decisions of married men and women. Using data from the Survey of Consumer Finances, we investigate how the spouse’s relative control over financial resources in the household and the life-cycle stage affect the investment choices of married women and men. The results show that married women who have more control over the financial resources are less likely to invest their Defined Contribution Plans (DCPs) in risky assets. Also, women who are married to relatively older men are less likely to take on risk with their DCPs. There is little evidence that the wife’s characteristics affect the investment decisions of married men.     

Einkommenseinbu?en durch Arbeitslosigkeit in Deutschland:

The article analyses the consequences of unemployment for earned income after reentering employment. The magnitude of these effects and their changes over the life course are described on the basis of existing research as well as own empirical analyses. The latter are based on administrative data from the German Pension Insurance (Versicherungskontenstichprobe VSKT 2006). Since previous studies differ with regard to both, sample definitions and the applied methods of causal analysis, our own empirical analysis of age- and gender-specific effects is based upon various methods of analysis while using a common dataset. We can show that income and wage penalties due to unemployment increase significantly with age. Moreover, women??s overall financial losses are higher than men??s, especially in the youngest age group.     

Investment communities: Behavioral attitudes and economic dynamics

Using a real-world data set encompassing the daily portfolio holdings and exposures of complex investment funds, we derive a set of quantitative attributes to capture essential behavioral features of fund managers. We find the existence and stability of three investment attitudes, namely the conservative, the reactive, and the pro-active profiles, defining communities that respond differently when facing external shocks. The conservative community has behavioral similarities that tend to decrease due to external shocks, the reactive community members greatly increase their activity level especially during turmoil phases, while delegated investors in the pro-active community are more resilient to turbulence and counterbalance the impact of the events by adjusting their portfolio exposures in advance. We show that exogenous shocks only temporarily perturb the behavioral traits of the communities which then go back to their original states once the distress is embedded.     

TECHNOLOGICAL ASYMMETRY AMONG FOREIGN INVESTORS AND MODE OF ENTRY

How does the preferred entry mode of foreign investors depend on their technological capability relative to that of their rivals? This article develops a simple model of entry mode choice and evaluates its main testable implication using data on foreign investors in Eastern European countries and the successor states of the Soviet Union. The model considers competition between two asymmetric foreign investors and captures the following trade‐off: while a joint venture (JV) helps a foreign investor secure a better position in the product market vis‐à‐vis its rival, it also requires that profits be shared with the local partner. The model predicts that the efficient foreign investor is less likely to choose a JV and more likely to enter directly relative to the inefficient investor. Our empirical analysis supports this prediction: foreign investors with more sophisticated technologies and marketing skills (relative to other firms in their industry) tend to prefer direct entry to JVs. This empirical finding is robust to controlling for host country–specific effects and other commonly cited determinants of entry mode. (JEL F13, F23, O32)     

Self-Reported Losses Versus Actual Losses in Online Gambling: An Empirical Study

Many research findings in the gambling studies field rely on self-report data. A very small body of empirical research also suggests that when using self-report, players report their gambling losses inaccurately. The aim of the present study was to evaluate the differences between objective and subjective gambling spent data by comparing gambler’s actual behavioral tracking data with their self-report data over a 1-month period. A total of 17,742 Norwegian online gamblers were asked to participate in an online survey. Of those surveyed, 1335 gamblers answered questions relating to gambling expenditure that could be compared with their actual gambling behavior. The study found that the estimated loss self-reported by gamblers was correlated with the actual objective loss and that players with higher losses tended to have more difficulty estimating their gambling expenditure (i.e., players who spent more money gambling also appeared to have more trouble estimating their expenses accurately). Overall, the findings demonstrate that caution is warranted when using self-report data relating to amount of money spent gambling in any studies that are totally reliant on self-report data.