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Session Overview
HH-5: Savings and Investments
Thursday, 22/Aug/2019:
8:30 - 10:00

Session Chair: Kim Peijnenburg, EDHEC Business School
Location: D -112

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IQ, Expectations, and Choice

Maritta Paloviita1, Francesco D'Acunto2, Daniel Hoang3, Michael Weber4

1Bank of Finland, Finland; 2Carroll School of Management, Boston College; 3Karlsruhe Institute of Technology; 4Booth School of Management, University of Chicago

Discussant: Kathrin Schlafmann (Copenhagen Business School)

We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking - they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.

efa2019-HH-5-953-IQ, Expectations, and Choice.pdf

Consuming Dividends

Konstantin Bräuer, Andreas Hackethal, Tobin Hanspal

Goethe-University Frankfurt, Germany

Discussant: Rawley Heimer (Boston College)

This paper studies why investors buy dividend-paying assets and how they time their consumption accordingly to anticipated income. We combine administrative data on bank customers with detailed portfolio and trading data, categorized consumption and income, and survey responses on financial behavior. Investors in our sample are excessively sensitive and increase consumption around dividend receipt, inconsistent with consumption smoothing. We find that the observed response is driven by financially sophisticated investors who select dividend portfolios, anticipate dividend income, and plan consumption accordingly. Our results contribute to the literature on a dividend clientele and provide evidence of ‘planned’ excess sensitivity.

efa2019-HH-5-1833-Consuming Dividends.pdf

Political Uncertainty and Household Stock Market Participation

Vikas Agarwal, Hadiye Aslan, Lixin Huang, Honglin Ren

Georgia State University, United States of America

Discussant: Steffen Meyer (University of Southern Denmark (SDU))

Using a unique micro-level panel dataset, we study the effect of political uncertainty on households’ stock market participation. We find that households significantly reduce their participation and reallocate to safer assets during periods of increased political uncertainty preceding gubernatorial elections. The decline in participation is related to households’ response to elevated asset risk and their incentive to hedge increased labor income risk. In situations where uncertainty remains high after elections, pre-election drops in participation are only partially reversed, reflecting a prolonged distortion in households’ stock investments. Such distortions can have implications for households, firms, and the economy in general.

efa2019-HH-5-871-Political Uncertainty and Household Stock Market Participation.pdf

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