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Down or Out: Assessing the Welfare Costs of Household Investment Mistakes

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Author Info
Laurent E. Calvet
John Y. Campbell
Paolo Sodini

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Abstract

This paper investigates the efficiency of household investment decisions using comprehensive disaggregated Swedish data. We consider two main sources of inefficiency: underdiversification ("down") and nonparticipation in risky asset markets ("out"). While a few households are very poorly diversified, most Swedish households outperform the Sharpe ratio of their domestic stock index through international diversification. Financially sophisticated households invest more efficiently but also more aggressively, and overall they incur higher return losses from underdiversification. The return cost of nonparticipation is smaller by almost one-half when we take account of the fact that nonparticipants would likely be inefficient investors. (c) 2007 by The University of Chicago. All rights reserved..

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File URL: http://www.journals.uchicago.edu/doi/pdf/10.1086/524204
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 115 (2007)
Issue (Month): 5 (October)
Pages: 707-747
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Handle: RePEc:ucp:jpolec:v:115:y:2007:i:5:p:707-747

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Raffaele Miniaci & Sergio Pastorello, 2008. "Mean-Variance Econometric Analysis of Household Portfolios," Working Papers 0807, University of Brescia, Department of Economics. [Downloadable!]
  2. Ødegaard, Bernt Arne, 2009. "Who moves stock prices? Monthly evidence," UiS Working Papers in Economics and Finance 2009/4, University of Stavanger. [Downloadable!]
  3. Luigi Guiso & Tullio Jappelli, 2006. "Information Acquisition and Portfolio Performance," CSEF Working Papers 167, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  4. Juergen Jung, 2008. "The Timing of Redistribution," Caepr Working Papers 2008-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  5. Tobias Broer, 2008. "The home bias of the poor: terms of trade effects and portfolios across the wealth distribution," Economics Working Papers ECO2008/28, European University Institute. [Downloadable!]
  6. Annamarie Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," Working Papers wp108, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
    Other versions:
  7. Olivier, Jacques & Tay, Anthony, 2008. "Time-Varying Incentives in the Mutual Fund Industry," CEPR Discussion Papers 6893, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Ning Tang & Olivia S. Mitchell, 2008. "The Efficiency of Pension Plan Investment Menus: Investment Choices in Defined Contribution Pension Plans," Working Papers wp176, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
  9. Bruce I. Carlin & Simon Gervais, 2009. "Legal Protection in Retail Financial Markets," NBER Working Papers 14972, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Bilias, Yannis & Georgarakos, Dimitris & Haliassos, Michalis, 2009. "Portfolio Inertia and Stock Market Fluctuations," CEPR Discussion Papers 7239, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth," Working Papers wp114, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
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  12. Dahlquist, Magnus & Robertsson, Göran & Rydqvist, Kristian, 2007. "Direct Evidence of Dividend Tax Clienteles," SIFR Research Report Series 51, Institute for Financial Research. [Downloadable!]
  13. Dahlquist, Magnus & Robertsson, Göran & Rydqvist, Kristian, 2006. "Direct Evidence of Dividend Tax Clienteles," CEPR Discussion Papers 6005, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  14. George M. Korniotis & Alok Kumar, 2008. "Do behavioral biases adversely affect the macro-economy?," Finance and Economics Discussion Series 2008-49, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  15. Timotheos Angelidis & Nikolaos Tessaromatis, 2009. "The Efficiency of Greek Public Pension Fund Portfolios," Working Papers 0035, University of Peloponnese, Department of Economics. [Downloadable!]
  16. Annamaria Lusardi & Olivia Mitchell, 2006. "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs," Working Papers wp144, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
  17. Charlotte Christiansen & Juanna Schröter Joensen & Jesper Rangvid, 2007. "Are Economists More Likely to Hold Stocks?," CREATES Research Papers 2007-08, School of Economics and Management, University of Aarhus. [Downloadable!]
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  18. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Measuring the Financial Sophistication of Households," NBER Working Papers 14699, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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