Experience, Loss Aversion, Narrow Framing: Can We Explain the Empirical Evidence on Household Portfolio Choice Over the Life-Cycle?

34 Pages Posted: 20 Mar 2012 Last revised: 9 Oct 2012

See all articles by Jingjing Chai

Jingjing Chai

Goethe University Frankfurt - Department of Finance

Raimond Maurer

Goethe University Frankfurt - Finance Department

Date Written: August 02, 2012

Abstract

This paper examines the life-cycle impact of preference factors as experience, loss aversion, and narrow framing on explaining the empirical low stock market participation, low stock share conditional on participation, and positive relationships between financial wealth and participation as well as conditional stock share. With respect to these investment behaviors and to consumption pattern, assuming common preference parameters and the high historical equity risk premium, the results show a better explanatory power than the standard consumption based utility function. In addition, the model predicts high levels and slow withdrawal rates of financial wealth among elderly people, which are consistent with the empirical evidence. Moreover, the model predictions are robust to flexible labor supply and endogenous retirement age.

Keywords: Portfolio Choice, Household Finance, Stock Market Participation, Wealth Effect, Narrow Framing, Loss Aversion, Experience

JEL Classification: D8, D91, G11, G12

Suggested Citation

Chai, Jingjing and Maurer, Raimond, Experience, Loss Aversion, Narrow Framing: Can We Explain the Empirical Evidence on Household Portfolio Choice Over the Life-Cycle? (August 02, 2012). Available at SSRN: https://ssrn.com/abstract=2012314 or http://dx.doi.org/10.2139/ssrn.2012314

Jingjing Chai (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Theodor-W.-Adorno-Platz 3
House of Finance
Frankfurt, 60323
Germany

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