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HH-5: Savings and Investments
IQ, Expectations, and Choice
1Bank of Finland, Finland; 2Carroll School of Management, Boston College; 3Karlsruhe Institute of Technology; 4Booth School of Management, University of Chicago
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.
Goethe-University Frankfurt, Germany
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.
Political Uncertainty and Household Stock Market Participation
Georgia State University, United States of America
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.
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