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Consumption-Wealth Comovement of the Wrong Sign

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Author Info
James J. Choi
David Laibson
Brigitte C. Madrian
Andrew Metrick

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Abstract

Economic theory predicts that an unexpected wealth windfall should increase consumption shortly after the windfall is received. We test this prediction using administrative records on over 40,000 401(k) accounts. Contrary to theory, we estimate a negative short-run marginal propensity to consume out of idiosyncratic 401(k) capital gains shocks. These results cannot be interpreted as standard intertemporal substitution, since the idiosyncratic returns that we study do not predict future returns. Instead, our findings imply that many investors are influenced by a positive feedback effect, through which higher recent returns encourage higher short-run saving. Like any other animal, 401(k) participants appear to increase behaviors that have been associated with high rewards in the past.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10454.

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Date of creation: Apr 2004
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Handle: RePEc:nbr:nberwo:10454

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Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
G1 - Financial Economics - - General Financial Markets

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References listed on IDEAS
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. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2002. "Defined Contribution Pensions: Plan Rules, Participant Choices, and the Path of Least Resistance," NBER Chapters, in: Tax Policy and the Economy, Volume 16, pages 67-114 National Bureau of Economic Research, Inc. [Downloadable!]
  2. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-81, September. [Downloadable!] (restricted)
  3. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1992-2), pages 61-156. [Downloadable!]
  4. Gary Charness & Dan Levin, 2003. "Bayesian Updating vs. Reinforcement and Affect: A Laboratory Study," Levine's Bibliography 666156000000000180, UCLA Department of Economics. [Downloadable!]
  5. James J. Choi & David Laibson & Brigitte Madrian & Andrew Metrick, 2004. "Employees' Investment Decisions about Company Stock," NBER Working Papers 10228, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "Defined Contribution Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance," NBER Working Papers 8655, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Burtless, Gary, 1986. "Social Security, Unanticipated Benefit Increases, and the Timing of Retirement," Review of Economic Studies, Blackwell Publishing, vol. 53(5), pages 781-805, October. [Downloadable!] (restricted)
  8. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2001. "For Better or For Worse: Default Effects and 401(k) Savings Behavior," NBER Working Papers 8651, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. George-Marios Angeletos et al., 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer. [Downloadable!] (restricted)
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(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. Malcolm Baker & Stefan Nagel & Jeffrey Wurgler, 2006. "The Effect of Dividends on Consumption," NBER Working Papers 12288, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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