scholarly journals Hyperbolic discounting and life-cycle portfolio choice

2015 ◽  
Vol 14 (4) ◽  
pp. 492-524 ◽  
Author(s):  
DAVID LOVE ◽  
GREGORY PHELAN
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Portfolio Choice ◽  
Asset Allocation ◽  
Financial Literacy ◽  
Hyperbolic Discounting ◽  
Fixed Cost ◽  
Future Earnings ◽  
Financial Wealth ◽  
The Impact

AbstractThis paper studies how hyperbolic discounting affects stock market participation, asset allocation, and saving decisions over the life cycle in an economy with Epstein–Zin preferences. Hyperbolic discounting affects saving and portfolio decisions through at least two channels: (1) it lowers desired saving, which decreases financial wealth relative to future earnings; and (2) it lowers the incentive to pay a fixed cost to enter the stock market. We find that hyperbolic discounters accumulate less wealth relative to their geometric counterparts and that they participate in the stock market at a later age. Because they have lower levels of financial wealth relative to future earnings, hyperbolic discounters who do participate in the stock market tend to hold a higher share of equities, particularly in the retirement years. We find that increasing the elasticity of intertemporal substitution, holding risk aversion constant, greatly magnifies the impact of hyperbolic discounting on all of the model's decision rules and simulated levels of participation, allocation, and wealth. Finally, we introduce endogenous financial knowledge accumulation and find that hyperbolic discounting leads to lower financial literacy and inefficient stock market investment.

Life-cycle asset allocation and the peso problem: does ambiguity aversion matter?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nuno Silva
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Asset Allocation ◽  
Stock Prices ◽  
Stock Price ◽  
Ambiguity Aversion ◽  
Content Type ◽  
Portfolio Decisions ◽  
State Of The Economy ◽  
The Impact

PurposeThe study aims to show that ambiguity aversion exerts a non-negligible effect on the investors' decisions, especially due to the possibility of sharp declines in stock prices.Design/methodology/approachThe vast majority of previous studies on life-cycle consumption and asset allocation assume that the equity premium is constant. This study evaluates the impact of rare disasters that shift the stock market to a low return state on investors' consumption and portfolio decisions. The author assumes that investors are averse to ambiguity relative to the current state of the economy and must incur a per period cost to participate in the stock market and solve their optimal consumption and asset allocation problem using dynamic programming.FindingsThe results show that most young investors choose not to invest in stocks because they have low accumulated wealth and the potential return from their stock market investments would not cover the participation costs. Furthermore, ambiguity-averse investors hold considerably fewer stocks throughout their lifetime than ambiguity-neutral ones. The fraction of wealth invested in stocks over the typical consumer's life is hump-shaped: it is low for a young individual, peaks at his early 30s and then decreases until his retirement age.Originality/valueTo the best of the author’s knowledge, this is the first study that assesses the impact of negative stock price jumps on the optimal portfolio of an ambiguity-averse investor.

scholarly journals Life-Cycle Asset Allocation with Ambiguity Aversion and Learning

2018 ◽  
Vol 53 (5) ◽  
pp. 1963-1994 ◽  
Author(s):  
Kim Peijnenburg
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Risk Aversion ◽  
Asset Allocation ◽  
Ambiguity Aversion ◽  
Home Bias ◽  
Equity Premium ◽  
Financial Wealth ◽  
Stock Market Participation ◽  
Sharpe Ratios

Ambiguity and learning about the equity premium can simultaneously explain the low fraction of financial wealth allocated to stocks over the life cycle and the stock market participation puzzle. Individuals are ambiguous about the size of the equity premium and are averse to this ambiguity, resulting in lower stock allocations over the life cycle, consistent with the data. As agents get older, they learn about the equity premium and increase their allocation to stocks. Furthermore, I find that ambiguity leads to underdiversification, home bias, lower Sharpe ratios, and higher savings. Similar results cannot be obtained by assuming higher risk aversion.

Life-cycle choices and risk

2018 ◽  
Author(s):  
Hans Fehr ◽  
Fabian Kindermann
Keyword(s):  
Decision Making ◽  
Life Cycle ◽  
Portfolio Choice ◽  
Labour Supply ◽  
Labour Force ◽  
Labour Productivity ◽  
Precautionary Savings ◽  
Longevity Risk ◽  
Future Earnings ◽  
Participation Decision

The optimal savings and investment decisions of households along the life cycle were a central issue in Chapter 5. There, savings decisions were made under various forms of risks.However, we restricted our analysis to three period models owing to the limitations of the numerical all-in-one solution we used. In this chapter we want to take a different approach. Applying the dynamic programming techniques learned so far allows us to separate decision-making at different stages of the life cycle into small sub-problems and therefore increase the number of periods we want to look at enormously. This enables us to take amuchmore detailed look at how life-cycle labour supply, savings, and portfolio choice decisions are made in the presence of earnings, investment, and longevity risk. Unlike in Chapter 9, the models we study here are partial equilibrium models. Hence, all prices as well as government policies are exogenous and do not react to changes in household behaviour. This chapter is split into two parts. The first part focuses on labour supply and savings decisions in the presence of labour-productivity and longevity risk. Insurance markets against these risks are missing, such that households will try to self-insure using the only savings vehicle available, a risk-free asset. This model is a quite standard workhorse model in macroeconomics and a straightforward general equilibrium extension exists, the overlapping generations model, which we study in Chapter 11. In the second part of the chapter, we slightly change our viewpoint and look upon the problem of life-cycle decision-making from a financial economics perspective. We therefore exclude laboursupply decisions, but focus on the optimal portfolio choice of households along the life cycle, when various forms of investment vehicles like bonds, stocks, annuities, and retirement accounts are available. This section is devoted to analysing consumption and savings behaviour when households face uncertainty about future earnings and the length of their life span. We study how households can use precautionary savings in a risk-free asset as a means to selfinsure against the risks they face. While in our baseline model we assume that agents always work full-time, we relax this assumption later on by considering a model with endogenous labour supply as well as a model with a labour-force participation decision of second earners within a family context.

Evaluating the impact of hedonism on investment choices in India

2019 ◽  
Vol 45 (12) ◽  
pp. 1526-1541 ◽  
Author(s):  
Harish Kumar Singla ◽  
Amit Hiray
Keyword(s):  
Stock Market ◽  
Financial Literacy ◽  
Structural Equation ◽  
Measurement Model ◽  
Equation Model ◽  
Social Recognition ◽  
Fixed Income ◽  
Content Type ◽  
The Impact ◽  
Investment Choices

Purpose The purpose of this paper is to find the effect of the hedonism value on the investment preference in India. Design/methodology/approach Based on the literature review, a measurement model is developed to measure hedonism. Further, the effect of hedonism on investment choices of an individual and the impact of age, gender and income level on investment choices and on hedonism are also measured through a structural equation model (SEM). Findings The study finds that the measurement model is reliable, and all five items, that is an exciting life, happiness, pleasure, social recognition and a comfortable life, are an appropriate measure of hedonism. The study finds that hedonists prefer to invest in stock market-related instruments and real estate. The study also ascertains that age and income affect the hedonism value negatively. The findings also indicate that women prefer to invest in fixed income instruments and men prefer to invest in stock market-related instruments. As people grow in age, they prefer to invest in fixed-income instruments and gold as a hedge, thus avoiding risky investments. Research limitations/implications The study does not include education and financial literacy of individuals in the model, rather controls these factors by selecting a sample where the minimum educational qualification of the respondent is graduation. Practical implications It is assumed that the values that drive an individual have the potential to influence his/her investment choices. Therefore, the study advises the firms offering investment services to their clients to ensure that apart from studying the demographic and risk profile of individuals, they also assess their value system. This can help them target their customers more precisely and serve them better. Originality/value The study is perhaps the first attempt to find the effect of personal values (specifically hedonism) on investment choices made by individuals, through the development of an SEM.

scholarly journals What is the impact of stock market contagion on an investor’s portfolio choice?

2009 ◽  
Vol 45 (1) ◽  
pp. 94-112 ◽  
Author(s):  
Nicole Branger ◽  
Holger Kraft ◽  
Christoph Meinerding
Keyword(s):  
Stock Market ◽  
Portfolio Choice ◽  
Market Contagion ◽  
The Impact

Addressing Financial Risks and Uncertainties Through Financial Literacy Education

2021 ◽  
pp. 437-456
Author(s):  
Danielle McKain
Keyword(s):  
Climate Change ◽  
Stock Market ◽  
Financial Literacy ◽  
Financial Stability ◽  
Literacy Education ◽  
Financial Instability ◽  
Financial Risks ◽  
Increased Risk ◽  
The World ◽  
The Impact

The world is full of financial risks and uncertainties even for those who have financial literacy. There are many factors to consider when planning financially: the stock market, hyperinflation, and climate change all play roles and are unpredictable. This chapter will focus on the actions that are being taken to establish financial literacy across the world and the impact these actions have on individual financial stability. Although financial literacy certainly cannot eliminate the risks and uncertainties that accompany unforeseen events, it is one way to prepare for these events. Even in times of normalcy, lack of financial literacy can put individuals at an increased risk of financial instability. This chapter presents a variety of recommendations and resources for financial literacy education as well as the risks and uncertainties that accompany their use.

scholarly journals Financial Sophistication, Personality and Stock Market Participation: Theory and Evidence

2018 ◽  
Vol 7 (1) ◽  
pp. 61-84
Author(s):  
Muhammad Akhtar ◽  
Faqir Muhammad ◽  
Muhammad Ayub Siddiqui
Keyword(s):  
Stock Market ◽  
Financial Literacy ◽  
Negative Impact ◽  
Future Research ◽  
Market Participation ◽  
Market Participants ◽  
Stock Market Participation ◽  
And Gender ◽  
Viable Approach ◽  
The Impact

In this empirical study, the authors examined the extent to which financial sophistication and personality effects stock market participation. Using archival research methodology, our hypothesis has been tested on a random sample of 451 stock market participants. Moderation has been tested through Andrew Hayes process. Extroversion and openness to experience positively impact stock market participation, while consciousness, agreeableness, and neuroticism have a negative impact. Financial literacy, trading experience and gender are the likely paths by which personality impacts stock market participation. Financial literacy can modify the relationship between some basic personality traits and stock market participation. It shows that behavior finance is not completely predetermined by one’s DNA and also identifies which traits are less influenced by financial literacy. Perhaps this implies that these traits are more predetermined by one’s innate characteristics. This study provides an interdisciplinary contribution by extending Big Five taxonomy as a viable approach for stock market participation. Future research may investigate the impact of family resources, investment exposure, and parent’s financial literacy, which were beyond the scope of the current study. The theoretical and practical implications of the study with respect to stock market participation are discussed.

Addressing Financial Risks and Uncertainties Through Financial Literacy Education

2019 ◽  
pp. 199-218
Author(s):  
Danielle McKain
Keyword(s):  
Climate Change ◽  
Stock Market ◽  
Financial Literacy ◽  
Financial Stability ◽  
Literacy Education ◽  
Financial Instability ◽  
Financial Risks ◽  
Increased Risk ◽  
The World ◽  
The Impact

The world is full of financial risks and uncertainties even for those who have financial literacy. There are many factors to consider when planning financially: the stock market, hyperinflation, and climate change all play roles and are unpredictable. This chapter will focus on the actions that are being taken to establish financial literacy across the world and the impact these actions have on individual financial stability. Although financial literacy certainly cannot eliminate the risks and uncertainties that accompany unforeseen events, it is one way to prepare for these events. Even in times of normalcy, lack of financial literacy can put individuals at an increased risk of financial instability. This chapter presents a variety of recommendations and resources for financial literacy education as well as the risks and uncertainties that accompany their use.

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