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What drives investors to chase returns?

Author

Listed:
  • Jonathan Huntley

    (Penn Wharton Budget Model, The Wharton School, University of Pennsylvania)

  • Valentina Michelangeli

    (Bank of Italy)

  • Felix Reichling

    (Penn Wharton Budget Model, The Wharton School, University of Pennsylvania)

Abstract

We use data on one-participant retirement savings plans to identify a behavioral bias in savings decisions. Investors who earn top-decile returns increase contributions to their accounts more than other investors. Using characteristics of the investors, characteristics of their retirement savings accounts, and multivariate regression analysis, we first show that such ``return chasing'' behavior is robust to controls for financial illiteracy, macroeconomic conditions, learning, transaction costs, housing prices, and informational frictions. We then use a structural two-asset model with tax-deferred and taxable assets to show that a permanent increase in expected returns produces investment responses for younger or liquidity-constrained investors that are consistent with our data. Our results provide evidence that younger investors' recent portfolio experiences have highly persistent effects on their expectations.

Suggested Citation

  • Jonathan Huntley & Valentina Michelangeli & Felix Reichling, 2021. "What drives investors to chase returns?," Temi di discussione (Economic working papers) 1334, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1334_21
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2021/2021-1334/en_tema_1334.pdf
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    More about this item

    Keywords

    household finance; retirement saving; life-cycle;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G4 - Financial Economics - - Behavioral Finance

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