what matters to individual investors? evidence from the ...introduction equity share mutual funds...
TRANSCRIPT
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Introduction Equity Share Mutual Funds Conclusion
What Matters to Individual Investors? Evidencefrom the Horse’s Mouth
James J. Choi &Adriana Z. Robertson
Yale University &University of Toronto
May 12, 2018
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Introduction Equity Share Mutual Funds Conclusion
Theories of Investor Motives & Beliefs
Many . . .
Ever Multiplying
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Introduction Equity Share Mutual Funds Conclusion
Theories of Investor Motives & Beliefs
Many . . .
Ever Multiplying
![Page 4: What Matters to Individual Investors? Evidence from the ...Introduction Equity Share Mutual Funds Conclusion Our Paper We ask 1,098 U.S. individuals in RAND American Life Panel: I](https://reader033.vdocuments.net/reader033/viewer/2022052008/601d78f8fe5c62455e6ee2b8/html5/thumbnails/4.jpg)
Introduction Equity Share Mutual Funds Conclusion
Theories of Investor Motives & Beliefs
Many . . .
Ever Multiplying
![Page 5: What Matters to Individual Investors? Evidence from the ...Introduction Equity Share Mutual Funds Conclusion Our Paper We ask 1,098 U.S. individuals in RAND American Life Panel: I](https://reader033.vdocuments.net/reader033/viewer/2022052008/601d78f8fe5c62455e6ee2b8/html5/thumbnails/5.jpg)
Introduction Equity Share Mutual Funds Conclusion
Testing these Theories is Hard
I Finding exogenous variation difficult
I Identification often relies upon rational expectations
I Estimates from valid IV designs are local average treatmenteffects, often in special subpopulations
I Hard to compare effect sizes across studies
I Predictions of competing models often similar or identicalI Fundamental assumptions in some leading models hard to
directly testI Long run risk, rare disastersI John Campbell: “dark matter for economists”
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Introduction Equity Share Mutual Funds Conclusion
Testing these Theories is Hard
I Finding exogenous variation difficult
I Identification often relies upon rational expectations
I Estimates from valid IV designs are local average treatmenteffects, often in special subpopulations
I Hard to compare effect sizes across studies
I Predictions of competing models often similar or identicalI Fundamental assumptions in some leading models hard to
directly testI Long run risk, rare disastersI John Campbell: “dark matter for economists”
![Page 7: What Matters to Individual Investors? Evidence from the ...Introduction Equity Share Mutual Funds Conclusion Our Paper We ask 1,098 U.S. individuals in RAND American Life Panel: I](https://reader033.vdocuments.net/reader033/viewer/2022052008/601d78f8fe5c62455e6ee2b8/html5/thumbnails/7.jpg)
Introduction Equity Share Mutual Funds Conclusion
Our Paper
We ask 1,098 U.S. individuals in RAND American Life Panel:
I How well leading academic theories describe their concerns,preferences, and beliefs
Topics:
I Equity share of portfolio
I Actively managed mutual funds
I Cross-section of stock returns
Sample Design Process Weights
Limitations Surveys in Finance
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Introduction Equity Share Mutual Funds Conclusion
Equity Share
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Introduction Equity Share Mutual Funds Conclusion
Factor Ratings
Stock market participants
I How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks?
Stock market non-participants
I How important are the following factors in causing you to notcurrently own any stocks?
Answer options
I Not important at all, a little important, moderately important,very important, extremely important
Opening Questions
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Introduction Equity Share Mutual Funds Conclusion
Big Picture
We divide the questions into 6 groups:
I Neoclassical AP Models
I Background Risks & Assets
I Social & Personal
I Nonstandard Preferences
I Beliefs
I Other (Heuristics &Transactional)
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
0 .1 .2 .3 .4 .5 0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Neoclassical AP Models
We asked about 9 factors drawn from neoclassical representativeagent asset pricing models:
→ Return Covariance withMarginal Utility of Money
→ Return Covariance withConsumption Growth
→ Rare Disaster Risk
→ Consumption CompositionRisk
→ Consumption Commitments
→ Risk of AggregateConsumption over Next Year
→ Risk of Long-Run AggregateConsumption
→ Risk of AggregateConsumption Volatility overNext Year
→ Risk of Long-Run AggregateConsumption Volatility
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Cons. Composition RiskAgg. Cons. Vol. RiskCov with Cons. Growth
Long−Run Agg. Cons. RiskAgg. Cons. Risk
Cov with MU of MoneyConsumption Commitments
Rare Disaster Risk
0 .1 .2 .3 .4 .5
Long−Run Agg. Cons. Vol. Risk
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Background Risks & Assets
We asked about the importance of 10 risks and assets outside ofthe stock market:
→ Risk of Illness/Injury
→ Labor Income Risk***
→ Years until Retirement***
→ Human Capital
→ Time until SignificantNon-Retirement Expense
→ Home Value Risk****
→ Non-Financial Risk
→ Non-Financial AssetsCushion Losses**
→ Stocks are an InflationHedge**
→ Wealth Too Small*
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Home Value Risk ****
Time to Significant ExpenditureHuman Capital
Labor Income Risk ***
Illness/Injury RiskTime to Retirement ***Wealth Too Small *
0 .1 .2 .3 .4 .5
Non−Financial Cushion **
Non−Financial Risk
Inflation Hedge **
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Home Value Risk ****Cons. Composition RiskAgg. Cons. Vol. RiskCov with Cons. Growth
Long−Run Agg. Cons. RiskAgg. Cons. Risk
Cov with MU of MoneyConsumption CommitmentsTime to Significant ExpenditureHuman Capital
Labor Income Risk ***Rare Disaster Risk
Illness/Injury RiskTime to Retirement ***Wealth Too Small *
0 .1 .2 .3 .4 .5
Non−Financial Cushion **
Non−Financial Risk
Inflation Hedge **
Long−Run Agg. Cons. Vol. Risk
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Social & Personal Factors
We asked about 11 social & personal factors:
→ Low Trust in MarketParticipants
→ Lack of Trustworthy Advisor
→ Lack of Knowledge AboutHow to Invest
→ Advice from a ProfessionalFinancial Advisor
→ Advice from Peers or Family
→ Advice from Media
→ Experience of LivingThrough Returns
→ Personal ExperienceInvesting in Stock Market
→ Religion
→ Finance Phobia*
→ Never Got Around to It*
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Lack of Advisor
Lack of KnowledgeLack of TrustFinance Phobia *
0 .1 .2 .3 .4 .5
Never Got Around to It *
Advice, Peers, Family
Advice, Media
Religion
Experience of Investing
Advice, Professional
Experience of Returns
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Home Value Risk ****Cons. Composition RiskAgg. Cons. Vol. RiskCov with Cons. Growth
Long−Run Agg. Cons. RiskAgg. Cons. RiskLack of AdvisorCov with MU of MoneyConsumption CommitmentsTime to Significant ExpenditureHuman CapitalLack of KnowledgeLack of TrustFinance Phobia *Labor Income Risk ***Rare Disaster Risk
Illness/Injury RiskTime to Retirement ***Wealth Too Small *
0 .1 .2 .3 .4 .5
Never Got Around to It *
Advice, Peers, Family
Advice, Media
Non−Financial Cushion **
Non−Financial Risk
Inflation Hedge **
Religion
Experience of Investing
Long−Run Agg. Cons. Vol. Risk
Advice, Professional
Experience of Returns
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Other Factors
We asked about 5 transactional factors and heuristics:
→ Cash for Routine Expenses
→ Time to Cash
→ 401(k) Default
→ Rule of Thumb
→ Returns Before Birth
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Time to Cash
Cash for Routine Expenses
0 .1 .2 .3 .4 .5
Rule of Thumb
Returns Before Birth
401(k) Default
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Home Value Risk ****Cons. Composition RiskAgg. Cons. Vol. RiskCov with Cons. GrowthTime to CashLong−Run Agg. Cons. RiskAgg. Cons. RiskLack of AdvisorCov with MU of MoneyConsumption CommitmentsTime to Significant ExpenditureHuman CapitalLack of KnowledgeLack of TrustFinance Phobia *Labor Income Risk ***Rare Disaster RiskCash for Routine ExpensesIllness/Injury RiskTime to Retirement ***Wealth Too Small *
0 .1 .2 .3 .4 .5
Never Got Around to It *
Advice, Peers, Family
Rule of Thumb
Advice, Media
Returns Before Birth
Non−Financial Cushion **
Non−Financial Risk
Inflation Hedge **
Religion
401(k) Default
Experience of Investing
Long−Run Agg. Cons. Vol. Risk
Advice, Professional
Experience of Returns
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Nonstandard Preferences
We asked about 4 non-standard preference based factors:
→ Loss Aversion
→ Ambiguity / ParameterUncertainty
→ External Habit
→ Internal Habit
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Loss Aversion
0 .1 .2 .3 .4 .5
External Habit
Ambiguity/Parameter Uncertainty
Internal Habit
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Loss AversionHome Value Risk ****Cons. Composition RiskAgg. Cons. Vol. RiskCov with Cons. GrowthTime to CashLong−Run Agg. Cons. RiskAgg. Cons. RiskLack of AdvisorCov with MU of MoneyConsumption CommitmentsTime to Significant ExpenditureHuman CapitalLack of KnowledgeLack of TrustFinance Phobia *Labor Income Risk ***Rare Disaster RiskCash for Routine ExpensesIllness/Injury RiskTime to Retirement ***Wealth Too Small *
0 .1 .2 .3 .4 .5
Never Got Around to It *
Advice, Peers, Family
Rule of Thumb
Advice, Media
Returns Before Birth
External Habit
Non−Financial Cushion **
Non−Financial Risk
Inflation Hedge **
Religion
401(k) Default
Experience of Investing
Long−Run Agg. Cons. Vol. Risk
Advice, Professional
Ambiguity/Parameter Uncertainty
Internal Habit
Experience of Returns
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Expected Return Beliefs
We asked about 4 categories of expected return beliefs:
→ Expected Stock ReturnsHigher than Usual**
→ Expected Stock ReturnsLower than Usual
→ Stock Market ReturnsMean-Revert
→ Stock Market Returns haveMomentum
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
0 .1 .2 .3 .4 .5
Market Mean Reversion
Market Momentum
E[R] Higher than Usual **
E[R] Lower than Usual
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Factors Affecting Equity Allocation
Loss AversionHome Value Risk ****Cons. Composition RiskAgg. Cons. Vol. RiskCov with Cons. GrowthTime to CashLong−Run Agg. Cons. RiskAgg. Cons. RiskLack of AdvisorCov with MU of MoneyConsumption CommitmentsTime to Significant ExpenditureHuman CapitalLack of KnowledgeLack of TrustFinance Phobia *Labor Income Risk ***Rare Disaster RiskCash for Routine ExpensesIllness/Injury RiskTime to Retirement ***Wealth Too Small *
0 .1 .2 .3 .4 .5
Never Got Around to It *
Advice, Peers, Family
Rule of Thumb
Advice, Media
Returns Before Birth
External Habit
Market Mean Reversion
Market Momentum
Non−Financial Cushion **
Non−Financial Risk
Inflation Hedge **
E[R] Higher than Usual **
E[R] Lower than Usual
Religion
401(k) Default
Experience of Investing
Long−Run Agg. Cons. Vol. Risk
Advice, Professional
Ambiguity/Parameter Uncertainty
Internal Habit
Experience of Returns
0 .05.1.15.2.25
Neoclassical
Background Factors
Social & Personal
Other
Nonstandard Prefs
Beliefs
* Non−participants only. ** Participants only. *** Employed only. **** Homeowners only.
Proportion Responding Very or Extremely ImportantEquity Allocation
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Introduction Equity Share Mutual Funds Conclusion
Actively Managed Mutual Funds
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Introduction Equity Share Mutual Funds Conclusion
Why Do People Buy Actively Managed Funds?
We asked about 4 factors and 2 empirical claims:
→ Higher Returns
→ Hedging
→ Advisor Recommendation
→ Passive Not Available
→ Decreasing Returns to Scale
→ Past Returns are Evidence ofManagerial Skill
More
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Introduction Equity Share Mutual Funds Conclusion
Why Do People Buy Actively Managed Funds?
Passive not Available *
Hedging *
Advisor Recommendation *
Higher Returns *
0 .1 .2 .3 .4 .5
Very or Extremely Important
Decreasing Returns
Managerial Skill
0 .1 .2 .3 .4
Agree or Strongly Agree
* Among respondents who had purchased an actively managed mutual fund at some point in the past.
Proportion Responding...Actively Managed Stock Mutual Funds
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Introduction Equity Share Mutual Funds Conclusion
Conclusion
Equity Share
I Most of the leading academic theories receive non-trivialsupport.
I Particular support for:I Economic disastersI Investment horizonI Background risk (health, labor income)I Need for cash on hand for routine expensesI Fixed costs of stock market participationI Finance phobia
Complexity PCA
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Introduction Equity Share Mutual Funds Conclusion
Conclusion
Actively Managed Mutual FundsParticular support for:
I A belief in higher returns
I Advisor recommendations
I Non-trivial support for hedging demand
Households tend to believe that:
I Past fund performance is a good signal of stock-picking skill
I Funds do not suffer from diseconomies of scale
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Introduction Equity Share Mutual Funds Conclusion
The End
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Cross Sectional Factors
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Growth Stocks versus Value Stocks
Are you familiar with the terms “growth stock” and “value stock”?
I 24% were familiar with both
I 66% were familiar with neither
A value stock is a stock that has a low price relative to its currentprofits (and other fundamentals). A growth stock is a stock thathas a high price relative to its current profits (and otherfundamentals).
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Growth Stocks versus Value Stocks
No Response
No Opinion
Less Risky
Equally Risky
Riskier
0 .1 .2 .3 .4
Value Stocks are...
No Response
No Opinion
Lower Returns
About the Same Returns
Higher Returns
0 .05.1.15.2.25
Value Stocks have...
Compared to Growth Stocks,
Risk Return
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Momentum
No Response
No Opinion
Less Risky
Equally Risky
Riskier
0 .1 .2 .3
High Momentum Stocks are...
No Response
No Opinion
Lower Returns
About the Same Returns
Higher Returns
0 .1 .2 .3
High Momentum Stocks have...
Compared to Low Momentum Stocks,
Risk Return
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Questions
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Rare Disaster Risk
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that in an economic disaster where the amount thatthe U.S. economy produces in a year shrinks by more than10% – like the Great Depression – a dollar I invested in stockswould lose more value than a dollar I put in a bank savingsaccount.
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Consumption Commitments
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I My fixed expenses (like mortgage payments, rent, carpayments, utility bills, etc.) that are difficult to adjust in theshort run.
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Return Covariance with Marginal Utility of Money
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that when I especially need the money, the stockmarket will tend to drop.
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Risk of Aggregate Consumption over Next Year
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that when bad news arrives about how the U.S.’smaterial standard of living will change over the next year, thestock market will tend to drop.
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Risk of Long-Run Aggregate Consumption
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Risk of Long-Run Aggregate Consumption Concern that whenbad news arrives about how the U.S.’s material standard ofliving will change over the 5 year period starting 1 year in thefuture, the stock market will tend to drop.
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Return Covariance with Consumption Growth
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that when I have to cut my spending, the stockmarket will tend to drop.
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Risk of Aggregate Consumption Volatility over Next Year
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that when uncertainty increases about how the U.S.’smaterial standard of living will change over the next year, thestock market will tend to drop.
Back
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Consumption Composition Risk
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that when the quality of my physical living situation(how nice my housing is, the safety of my neighborhood, etc.)is dropping faster than the rest of my material quality of life,the stock market will tend to drop.
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Risk of Long-Run Aggregate Consumption Volatility
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that when uncertainty increases about how the U.S.’smaterial standard of living will change over the 10 year periodstarting 1 year in the future, the stock market will tend todrop.
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Wealth Too Small
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The amount of money I have available to invest in stocks istoo small.
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Years until Retirement
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Years left until retirement The number of years I (and myspouse/partner, if applicable) have left until retirement.
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Risk of Illness/Injury
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The risk of expenses due to illness or injury to me or someoneelse in my family.
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Labor Income Risk
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that I (or my spouse/partner, if applicable) mightbecome unemployed, receive a pay cut, or not receive anexpected pay increase.
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Human Capital
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The difference between how much money I have available toinvest right now and all the money I (and my spouse/partner,if applicable) expect to earn in wages over the rest of my life.
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Time until Significant Non-Retirement Expense
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I How soon I will have significant expenses (like a car purchase,a down payment on a home, school tuition, etc.).
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Home Value Risk
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that my home value might fall.
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Stocks are an Inflation Hedge
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I A belief that stocks are attractive because when my livingexpenses increase unexpectedly, the stock market will tend torise.
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Non-Financial Assets Cushion Losses
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I A belief that I can afford to take more risks in my financialportfolio because my non-financial assets (such as my home orsmall business) will cushion me against losses in my financialportfolio.
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Non-Financial Risk
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern my non-financial assets other than my home – suchas my small business – might lose value.
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Loss Aversion
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The possibility of even small losses on my stock investmentsmakes me worry.
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Internal Habit
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The difference between my current material standard of livingand the level I am used to.
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Ambiguity / Parameter Uncertainty
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I I don’t have a good sense of the average returns and risks ofinvesting in stocks.
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External Habit
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The difference between my current material standard of livingand the level everybody else around me has experiencedrecently.
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Expected Returns Lower than Usual
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I A belief that the returns I can expect to earn from investing instocks right now are lower than usual.
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Expected Returns Higher than Usual
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I A belief that the returns I can expect to earn from investing instocks right now are higher than usual.
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Stock Market Returns have Momentum
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I A belief that low stock market returns tend to be followed bymore low stock market returns.
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Stock Market Returns Mean-Revert
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I A belief that low stock market returns tend to be followed byhigh stock market returns.
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Finance Phobia
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I I don’t like to think about my finances.
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Low Trust in Market Participants
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that companies, managers, brokers, or other marketparticipants might cheat me out of my investments.
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Lack of Knowledge About How to Invest
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I My lack of knowledge about how to invest.
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Lack of Trustworthy Advisor
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Difficulty in finding a trustworthy advisor.
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Experience of Living Through Returns
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The feelings, attitudes, and beliefs about the stock marketI’ve gotten from living through stock market ups and downs(whether or not I was invested in stocks at the time).
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Advice from a Professional Financial Advisor
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Advice from a professional financial advisor I hired.
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Personal Experience Investing in Stock Market
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The feelings, attitudes, and beliefs about the stock marketI’ve gotten from my personal experiences of investing in thestock market.
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Religion
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I My religious beliefs, values, and experiences.
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Advice from Peers or Family
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Advice from a friend, family member, or coworker.
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Advice from Media
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Advice from a book or an article I read, or from somebody onTV, radio, or the internet.
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Never Got Around to It
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I I intended to invest in stocks but never got around to it.
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Cash for Routine Expenses
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The amount of cash I need to have on hand to pay routineexpenses.
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Time to Cash
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I Concern that stock investments will take too long to convertinto spendable cash in an emergency.
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401(k) Defaults
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I The default investment allocation in my (and/or myspouse/partner’s, if applicable) work-based retirement savingsplan (for example, 401(k), 403(b), Thrift Savings Plan).
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Returns Before Birth
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I What I know about the stock market’s returns during thedecades before I was born.
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Rule of Thumb
How important are the following factors in determining thepercentage of your investable financial assets that is currentlyinvested in stocks? (causing you to not currently own any stocks?)
I A rule of thumb (for example, “The percent you invest instocks should be 100 minus your age” or “Invest one-third instocks, one-third in bonds, and one-third in real estate”).
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Costs of Staying up to Date
How important are the following factors in causing the amount ofmoney you have to be too small to make it worthwhile to invest instocks?
I The ongoing time, money, and/or effort it would take to stayup-to-date on the stock market.
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Costs of Learning About Stocks
How important are the following factors in causing the amount ofmoney you have to be too small to make it worthwhile to invest instocks?
I The amount of time, money, and/or effort it would take tolearn about stocks.
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Costs of Hiring an Advisor
How important are the following factors in causing the amount ofmoney you have to be too small to make it worthwhile to invest instocks?
I The amount of time, money, and/or effort it would take tohire an investment advisor.
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Costs of Maintaining Advisor
How important are the following factors in causing the amount ofmoney you have to be too small to make it worthwhile to invest instocks?
I The ongoing time, money, and/or effort it would take tomaintain a relationship with an investment advisor after hiringhim or her.
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Costs of Maintaining an Account
How important are the following factors in causing the amount ofmoney you have to be too small to make it worthwhile to invest instocks?
I The ongoing time, money, and/or effort it would take tomaintain an investment account after setting it up.
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Costs of Setting up an Account
How important are the following factors in causing the amount ofmoney you have to be too small to make it worthwhile to invest instocks?
I The amount of time, money, and/or effort it would take to setup an investment account.
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Tax Complexity
How important are the following factors in causing the amount ofmoney you have to be too small to make it worthwhile to invest instocks?
I Stock investments would make my tax returns harder toprepare.
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Home
You said you own your home. How important is that in causingyou to not have enough money to make it worthwhile to invest instocks?
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Less Money Available Now
How important are the following factors in causing you to not getaround to investing in stocks?
I I have less money available now than when I originally plannedon investing in stocks.
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Too Costly
How important are the following factors in causing you to not getaround to investing in stocks?
I I discovered that it takes more time, money, and/or effort toinvest in stocks than I expected.
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Too Busy
How important are the following factors in causing you to not getaround to investing in stocks?
I I was too busy.
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Procrastinated
How important are the following factors in causing you to not getaround to investing in stocks?
I I procrastinated for no good reason.
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Not Important Enough
How important are the following factors in causing you to not getaround to investing in stocks?
I I decided it wasn’t important enough to think about it.
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Higher Returns
How important were the following factors in your decision(s) toinvest in an actively managed stock mutual fund instead of apassively managed stock mutual fund?
I A belief that the actively managed stock mutual fund wouldgive me higher returns on average than a passively managedstock mutual fund.
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Advisor Recommendation
How important were the following factors in your decision(s) toinvest in an actively managed stock mutual fund instead of apassively managed stock mutual fund?
I The recommendation of an investment advisor I hired.
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Hedging
How important were the following factors in your decision(s) toinvest in an actively managed stock mutual fund instead of apassively managed stock mutual fund?
I A belief that even though the actively managed stock mutualfund would have lower returns on average than a passivelymanaged stock mutual fund, the actively managed fund wouldhave higher returns than the passively managed fund whenthe economy does poorly (for example, during recessions orstock market crashes).
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Passive Not Available
How important were the following factors in your decision(s) toinvest in an actively managed stock mutual fund instead of apassively managed stock mutual fund?
I A suitable passively managed stock mutual fund wasn’tavailable in my employer-sponsored retirement savings plan.
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Managerial Skill
How much do you agree with the following statements?
I When an actively managed stock mutual fund has hadsignificantly higher past returns than the overall stock market,this is strong evidence that its manager has goodstock-picking skills.
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Decreasing Returns to Scale
How much do you agree with the following statements?
I When an actively managed stock mutual fund gets moremoney to manage, it becomes harder for it to generate higherreturns than the overall stock market.
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Growth v Value – Risk
Compared to a growth stock, I expect a value stock to normally be...
I Riskier over the next year, on average
I Equally risky over the next year, on average
I Less risky over the next year, on average
I No opinion
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Growth v Value – Return
Compared to a growth stock, I expect a value stock to normallyhave ...
I Higher returns over the next year, on average
I About the same returns over the next year, on average
I Lower returns over the next year, on average
I No opinion
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Momentum – Risk
Compared to a stock whose price fell a lot over the past year, Iexpect a stock whose price rose a lot over the past year tonormally be ...
I Riskier over the next year, on average
I Equally risky over the next year, on average
I Less risky over the next year, on average
I No opinion
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Momentum – Return
Compared to a stock whose price fell a lot over the past year, Iexpect a stock whose price rose a lot over the past year tonormally have ...
I Higher returns over the next year, on average
I About the same returns over the next year, on average
I Lower returns over the next year, on average
I No opinion
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Survey Panel
RAND American Life Panel.
I Survey completed between Dec. 14 and Dec. 27, 2016.
I RAND circulated an invitation to 2,148 members
I 1,255 read informed consent disclosure
I 1,202 gave consent
I 1,107 eligible (based on screening questions)
I 1,098 agreed to answer additional questions
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Surveys Design Process
I Pilot tested questions on MTurk:I Included “I don’t understand” as answer option for every
questionI Free-response question at end of equity allocation section for
additional factors we had not mentioned
I Solicited feedback from researchersI On third round of MTurk pilots:
I < 1% “do not understand” responses for 61 of 68 questionsI Remaining 7 questions: < 3% “do not understand” responses
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Surveys in Finance
I Most influential work on corporate dividend policy: Lintner(1956) survey
I More recent survey work in corporate finance seeking to testwide range of theories
I Graham and Harvey (2001), Brav et al. (2005), Graham,Harvey, and Rajgopal (2005), Gompers, Kaplan, andMukharlyamov (2016), and Gompers et al. (2016)
I More recent survey work of investment professionals to testacademic theories
I Cheung and Wong (2000), Cheung and Chinn (2001), andCheung, Chinn, and Marsh (2004)
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Limitations of Surveys
I Measurement Error More
I Perceptions v Reality More
I Our survey measures how people perceive themselves to bemaking decisions
I This may not be fully informative for how they actually makedecisions
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Measurement Error in Surveys
Measurement error can arise from:
I “Fat fingers”
I Poor incentives / Low motivation
I Meaning of response category differs across respondents
BUT if the errors white noise, the ordinal within-respondentranking is still informative
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Perceptions v Reality
Individuals might not know why they really do things
I Milton Friedman’s “as if” argumentI “We only care about what individuals do, not what they say or
think”
We think perceptions are still important. Why?
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Why We Should Care About Perceptions
1 Perceptions are unlikely to be entirely unrelated to truedecision process, which are useful for predicting behavior
I Harris and Keane (1999): Relative to model using only healthinsurance plan attributes, adding survey responses aboutimportance of attributes doubles predictive power
2 Perceived decision-making process affects individual’s forecastof future actions, which is an input to today’s actions
3 Perceptions can affect demand for debiasing mechanisms
4 It is inherently interesting to know what individuals believeabout themselves
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Opening Questions
I What is the value of all your investable financial assets?I Include the value of your bank accounts, brokerage accounts,
retirement savings accounts, investment properties, etc., butNOT the value of the home(s) you live in or any privatebusinesses you own.
I What percentage of your investable financial assets is currentlyinvested in stocks, either directly or through mutual funds?
I if > 0 → participantI if = 0 → non-participant
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Sample Weights
Weight responses to match U.S. adult population on:
I Gender
I Age
I Race/ethnicity
I Education
I # household members
I Household income
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Description Complexity & Factor Importance
Is description complexity related to reported factor importance?
importanceq = α+ β ∗ complexityq + εq
where
I importanceq ⇒ fraction responding very or extremelyimportant for factor q
I complexityq ⇒ complexity of question q, as measured byI the number of words used to describe the factorI the factor description’s Fleisch-Kincaid grade level score
Results
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Description Complexity & Factor Importance
importanceq = α+ β ∗ complexityq + εq
(1) (2)Importance Importance
Word Count 0.13(0.87)
Fleisch-Kincaid Score 0.0035(0.10)
Dependant variable is proportion of respondents describ-ing the factor as very or extremely important.t-statistics in parenthesis.
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Principal Component Analysis
A principal component analysis reveals 6 clusters of factors:
→ “Neoclassical asset pricing factors”
→ “Consumption needs and human capital”
→ “Return predictability and defaults”
→ “Discomfort with market”
→ “Advice”
→ “Personal experience”
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Principal Component 1: “Neoclassical asset pricingfactors”
I Risk of Aggregate Consumption over Next Year (0.41)
I Risk of Aggregate Consumption Volatility over Next Year(0.39)
I Risk of Long-Run Aggregate Consumption (0.39)
I Risk of Long-Run Aggregate Consumption Volatility (0.38)
I Return Covariance with Marginal Utility of Consumption(0.35)
I Return Covariance with Marginal Utility of Money (0.33)
I Consumption Composition Risk (0.26)
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Principal Component 2: “Consumption needs and humancapital”
I Consumption Commitments (0.45)
I Time until Significant Non-Retirement Expense (0.43)
I Internal Habit (0.36)
I Human Capital (0.34)
I Risk of Illness/Injury (0.32)
I External habit (0.30)
I Cash for Routine Expenses (0.27)
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Principal Component 3: “Return predictability anddefaults”
I Stock Market Returns Mean-Revert (0.49)
I Expected Stock Returns Lower than Usual (0.40)
I Stock Market Returns have Momentum (0.38)
I 401(k) Default (0.34)
I Rule of Thumb (0.26)
I Religion (0.25)
I Time to Cash (0.24)
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Principal Component 4: “Discomfort with market”
I Lack of Knowledge About How to Invest (0.50)
I Ambiguity / Parameter Uncertainty (0.49)
I Lack of Trustworthy Advisor (0.42)
I Loss Aversion (0.38)
I Low Trust in Market Participants (0.29)
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Principal Component 5: “Advice”
I Advice from Media (0.52)
I Advice from Peers or Family (0.51)
I External habit (0.31)
I Rule of Thumb (0.28)
I Returns Before Birth (0.26)
I Advice from a Professional Financial Advisor (0.20)
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Principal Component 6: “Personal experience”
I Experience of Living Through Returns (0.65)
I Personal Experience Investing in Stock Market (0.64)
I Returns Before Birth (0.20)
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Mutual Funds – Overview
I 52% report knowing what a mutual fund is.
I 33% have purchased shares in an actively managed mutualfund.
More
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Mutual Funds – Details
A mutual fund is a company that brings together money frommany people and invests it in stocks, bonds or other assets.
In an actively managed stock mutual fund, the fund manager triesto beak the overall stock market’s return by picking stocks to buy.In contrast, a passively managed stock mutual fund (also known asan index fund) holds stocks in order to match the performance of amarket benchmark (such as the S&P 500 stock market index) asclosely as possible.
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