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The Flypaper Effect in Individual Investor Asset Allocation

  • James Choi
  • David Laibson
  • Brigitte Madrian

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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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
Contact details of provider: Web page: http://icf.som.yale.edu/

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