Do Behavioral Biases Vary Across Individuals? Evidence From Individual Level 401(k) Data

Journal of Financial and Quantitative Analysis (Impact Factor: 1.77). 12/2006; 41(04):939-962. DOI: 10.1017/S0022109000002702
Source: RePEc


This paper investigates whether some individuals are prone to behavioral biases in their 401(k) investments. Using demographic data and allocation information for over 73,000 employees, I examine two allocation biases and a participation bias. The findings suggest that higher salaried employees tend to make significantly better choices. Participants who earn $100, 000 hold 12. 7% less in company stock, are 3% less likely to follow the framing 1/n heuristic, and are 37.7% more likely to participate than those earning $46, 000. Women make better choices in two of the three cases and I find evidence of mental accounting.

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    • "Consistent findings from psychological research, evidencing that humans have limited cognitive abilities and are controlled by emotions while making choices in risky and uncertain situations, drew financial behaviorists' attention to drawbacks of the homo economicus assumption and the hypothesis about the market's efficiency [cf. Markowitz, 1952; Fama, 1970, 1991; Von Neumann, Morgenstern, 1944] and the susceptibility of investors to so-called behavioral biases, resulting from cognitive and heuristics biases as well as emotions [Agnew, 2006]. These biases disrupt the rationality of the process of making investment decisions and contribute to inefficient market reactions to information and, as a result, to asset mispricing [Coval, Shumway, 2005; Rzeszutek, Czerwonka, 2011, 2012]. "

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    • "Overweighting a certain win over a highly probable option, as in the example above, prompts people to choose an option with a lower expected value. Therefore , the certainty effect was shown to lead to potentially less profitable investment decisions in the capital market (Agnew, 2006). "
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    ABSTRACT: The aim of this paper is to investigate the degree of susceptibility to behavioral biases (the certainty effect, the sunk cost fallacy, and mental accounting) among people of various levels of expertise in market investments and to determine whether this susceptibility is correlated with certain personality traits (impulsivity, venturesomeness, and empathy). The study included 200 participants: 100 retail investors who regularly invest in the Warsaw Stock Exchange and 100 students of the Warsaw School of Economics who are casually involved in investing. In this study, employing a survey methodology, we conducted a laboratory experiment that allowed us to isolate behavioral biases and personality traits and measure their influence on investors’ decision-making processes. The participants filled out questionnaires containing two parts: 1) three situational exercises, which assessed susceptibility to behavioral biases, and 2) the Impulsivity, Venturesomeness, Empathy Questionnaire (IVE) Questionnaire which measures three personality traits (impulsivity, venturesomeness, and empathy). Statistical analyses demonstrated that susceptibility to behavioral biases depends on the level of expertise in market investing such that expertise increases susceptibility to behavioral biases. Some personality traits influenced the participants’ likelihood of displaying these biases.
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    • "Repeated studies have identified low levels of choice and default behaviours across countries. For example, studies in the U.S. (Choi, Laibson, Madrian, and Metrick, 2002; Agnew, Balduzzi and Sunden, 2003; Ameriks and Zeldes, 2004; and Mitchell, et al. 2006), in Australia (Bowman, 2003; Clark-Murphy, Gerrans, and Speelman, 2009), and Sweden (Hedesstrom, Svedstar, and Garling, 2004) all describe high levels of choice inertia. "
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    ABSTRACT: This paper assesses the level of sophistication evident in investment choices of a large sample of individuals drawn from three Australian retirement savings funds. Available US and UK evidence is somewhat mixed on both the measures that should be used when measuring the sophistication as well as its prevalence. This paper investigates naive diversification heuristics using Australian member level investment choice data over a six year period, 2001 to 2006. Results suggest a strong preference for using a small number of options in investment choices. There is little evidence to support the 'pure' 1/n heuristic (Benartzi and Thaler, 2001). However when multiple options are selected, one-third are classified as conditional 1/n (Huberman and Jiang, 2006). The proportion of choices classified as conditional 1/n is strongly related to the number of options used in the choice. The possible consequence of menu framing on asset class allocation is investigated and does not support an influence of menu on effective allocations, at least in terms of equity exposure.
    SSRN Electronic Journal 02/2013; DOI:10.2139/ssrn.1636111
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