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Consumption-Wealth Comovement of the Wrong Sign

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

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.

Suggested Citation

  • James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2004. "Consumption-Wealth Comovement of the Wrong Sign," NBER Working Papers 10454, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10454
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    References listed on IDEAS

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    1. 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 848-881, September.
    2. James J. Choi & David Laibson & Brigitte C. Madrian & Andrew Metrick, 2004. "For Better or for Worse: Default Effects and 401(k) Savings Behavior," NBER Chapters, in: Perspectives on the Economics of Aging, pages 81-126, National Bureau of Economic Research, Inc.
    3. Gary Charness & Dan Levin, 2003. "Bayesian Updating vs. Reinforcement and Affect: A Laboratory Study," Levine's Bibliography 666156000000000180, UCLA Department of Economics.
    4. 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(2), pages 61-156.
    5. 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.
    6. 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.
    7. 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.
    8. Gary Burtless, 1986. "Social Security, Unanticipated Benefit Increases, and the Timing of Retirement," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 781-805.
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    Cited by:

    1. Bostic, Raphael & Gabriel, Stuart & Painter, Gary, 2009. "Housing wealth, financial wealth, and consumption: New evidence from micro data," Regional Science and Urban Economics, Elsevier, vol. 39(1), pages 79-89, January.
    2. James J. Choi & David Laibson & Brigitte C. Madrian, 2010. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1405-1432, April.
    3. J. Benjamin & P. Chinloy, 2008. "Home Equity, Household Savings and Consumption," The Journal of Real Estate Finance and Economics, Springer, vol. 37(1), pages 21-32, July.
    4. Malcolm Baker & Stefan Nagel & Jeffrey Wurgler, 2007. "The Effect of Dividends on Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 231-292.
    5. Stephan Schulmeister, 2004. "Aktienkursdynamik und privater Konsum in den USA und in Deutschland," WIFO Studies, WIFO, number 25188, June.

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    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G1 - Financial Economics - - General Financial Markets

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