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Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect

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  • James J. Choi
  • David Laibson
  • Brigitte C. Madrian

Abstract

Consistent with mental accounting, we document that investors sometimes choose the asset allocation for one account without considering the asset allocation of their other accounts. The setting is a firm that changed its 401(k) matching rules. Initially, 401(k) enrollees chose the allocation of their own contributions, but the firm chose the match allocation. These enrollees ignored the match allocation when choosing their own-contribution allocation. In the second regime, enrollees simultaneously selected both accounts' allocations, leading them to mentally integrate the two. Own-contribution allocations before the rule change equal the combined own- and match-contribution allocations afterwards, whereas combined allocations differ sharply across regimes.

Suggested Citation

  • James J. Choi & David Laibson & Brigitte C. Madrian, 2007. "Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect," NBER Working Papers 13656, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13656
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    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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