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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 selected both accounts' allocations, leading them to integrate the two. Own-contribution allocations before the rule change equal the combined own- and match-contribution allocations afterward, whereas combined allocations differ sharply across regimes. (JEL G11, J32)

Suggested Citation

  • James J. Choi & David Laibson & Brigitte C. Madrian, 2009. "Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect," American Economic Review, American Economic Association, vol. 99(5), pages 2085-2095, December.
  • Handle: RePEc:aea:aecrev:v:99:y:2009:i:5:p:2085-95
    Note: DOI: 10.1257/aer.99.5.2085
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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