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

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  • Sodini, Paolo
  • Calvet, Laurent E.
  • Campbell, John

Abstract

This paper investigates the efficiency of household investment decisions using comprehensive disaggregated Swedish data. We consider two main sources of inefficiency: underdiversification (“downâ€) and nonparticipation in risky asset markets (“outâ€). 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 oneâ€half when we take account of the fact that nonparticipants would likely be inefficient investors.

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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3122488.

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Date of creation: 2007
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Publication status: Published in Journal of Political Economy
Handle: RePEc:hrv:faseco:3122488

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