SNIC SUPR
Experience-based learning, stock market participation and portfolio choice
Dnr:

SNIC 2020/9-6

Type:

SNIC Small Compute

Principal Investigator:

Richard Foltyn

Affiliation:

Stockholms universitet

Start Date:

2020-01-09

End Date:

2021-02-01

Primary Classification:

50201: Economics

Webpage:

Allocation

Abstract

Recent evidence suggests that lifetime experiences play an important role in determining households' investment choices. I incorporate these findings into an otherwise standard life-cycle model and examine to what extent they can help resolve long-standing puzzles in the literature regarding stock market participation and the fraction of financial wealth invested in risky assets. Experience-based learning about returns creates a positive correlation between a household's position in the wealth distribution and its optimism about future returns. The wealthy consequently increase their investment in risky assets, while participation is limited among poor households. I find that in a reasonably calibrated quantitative model, this mechanism operates predominantly on the extensive margin and is able to close approximately half of the gap between participation rates observed in the data and the predictions from standard models. On the other hand, the conditional risky share in the cross-section remains mostly unaffected.