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.

20 Reads
  • Source
    • "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. "
    [Show abstract] [Hide abstract]
    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
  • Source
    • "These characteristics could also affect the formation of investor optimism and fear. To examine the possible impact of investment experience and financial sophistication, we run the same regression models as before, this time adding interaction terms for the levels and changes in realized past returns and realized past risk with derivatives trading (Bauer, Cosemans, and Eichholtz 2009), age quintiles (Korniotis and Kumar 2011b), account tenure (Agnew and Szykman 2005; Seru, Shumway, and Stoffman 2010), income (Agnew and Szykman 2005; Dhar and Zhu 2006), and wealth as proxied by the combined value of an investor's portfolio and house (Vissing-Jorgensen 2003; Agnew and Szykman 2005; van Rooij, Lusardi, and Alessie 2011). "
    [Show abstract] [Hide abstract]
    ABSTRACT: Optimism and fear are central determinants of individual investors’ trading and risk-taking behavior, but what makes investors optimistic or afraid? Using a unique combination of brokerage records and matching monthly survey measurements, we examine how investors update their optimism (return expectations) and fear (risk tolerance and risk perceptions) in response to individual return and risk experiences. Past returns positively impact return expectations and risk tolerance, and negatively impact risk perceptions. Realized risk, however, does not impact optimism and fear. Investors’ lack of awareness of realized risk is related to the complexity of standard risk measures, sophistication, and the salience of return signals.
    SSRN Electronic Journal 02/2013; DOI:10.2139/ssrn.1970284
  • Source
    • "Finally, another line of research, again mainly in relation to 401(k) plans in the US, has considered the impact of member inertia in aligning investment choice for current contributions and pre-existing assets (past contributions). Retirement savers are shown to be slow to rebalance portfolios, which can lead to allocations of total holdings that look very di¤erent compared with allocations of contributions (Samuelson and Zechhauser 1988; Ameriks and Zeldes 2001; Madrian and Shea 2001; Agnew, Balduzzi and Sunden 2003; Choi, Laibson, Madrian and Metrick 2004; and Mitchell, Mottola, Utkus and Yamaguchi 2006). "
    [Show abstract] [Hide abstract]
    ABSTRACT: We conducted a choice experiment to investigate whether retirement savers follow simple portfolio theory when choosing investments. We modeled experimental survey data on 693 participants using a scale-adjusted version of the latent class choice model. Results show that underlying variability in response was explained by age and “risk profile” score, and that preferences varied with income and age. Younger individuals were conventionally risk averse but older, higher income individuals may react positively to both higher returns and increasing risk, when risk is presented as widening ranges of possible outcomes. Respondents tended to choose among a few similar investments options. Findings should assist regulators and providers to target assistance to “at risk” retirement savers.
    SSRN Electronic Journal 08/2010; DOI:10.2139/ssrn.1665943
Show more


20 Reads
Available from