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The Flypaper Effect in Individual Investor Asset Allocation

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Author Info

  • James Choi
  • David Laibson
  • Brigitte Madrian

Abstract

We document a flypaper effect in asset allocation: securities received in kind "stick where they hit." We study a firm that twice changed the rules governing the securities in which its 401(k) matching contributions were initially invested. Both of these rule changes were economically neutral: employees were always free to immediately reallocate their match account balances. However, we find that most employees neither reallocate their match balances, nor offset employer-initiated changes in the match allocation by adjusting the allocation of their own contributions. Consequently, these rule changes caused dramatic shifts in participants' 401(k)portfolio risk. After examining several alternative explanations for this flypaper effect, we conclude that it is largely due to a combination of passivity and mental accounting.

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File URL: http://icfpub.som.yale.edu/publications/2560
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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2560.

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Date of creation: 01 Jan 2008
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Handle: RePEc:ysm:somwrk:amz2560

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Web page: http://icf.som.yale.edu/
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Keywords: asset allocation; 401(k); employee contributions Working Paper Series;

References

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  1. James J. Choi & David Laibson & Brigitte C. Madrian, 2005. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," NBER Working Papers 11554, National Bureau of Economic Research, Inc.
  2. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  3. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
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  17. Benartzi, Shlomo & Thaler, Richard H & Utkus, Stephen P & Sunstein, Cass R, 2007. "The Law and Economics of Company Stock in 401(k) Plans," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 45-79, February.
  18. Olivia S. Mitchell & Gary R. Mottola & Stephen P. Utkus & Takeshi Yamaguchi, 2006. "The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans," Working Papers wp115, University of Michigan, Michigan Retirement Research Center.
  19. Jeremy Clark, 2002. "House Money Effects in Public Good Experiments," Experimental Economics, Springer, vol. 5(3), pages 223-231, December.
  20. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
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