IQ and Stock Market Participation

Stock market participation is monotonically related to IQ, controlling for wealth, income, age, and other demographic and occupational information. The high correlation between IQ and participation exists even among the affluent. Supplemental data from siblings, studied with an instrumental variables approach and regressions that control for family effects, demonstrate that IQ's influence on participation extends to females and does not arise from omitted familial and nonfamilial variables. High‐IQ investors are more likely to hold mutual funds and larger numbers of stocks, experience lower risk, and earn higher Sharpe ratios. We discuss implications for policy and finance research.     

Message in a Metro: Building Urban Rail Infrastructure and Image in Delhi,India

The world over, infrastructure mega projects have become more prevalent, even as evidence suggests that such projects often experience significant cost overruns while failing to fully deliver on their projected benefits. In this light, this article will argue that continued support for infrastructure mega projects stems from the way that such projects are presented to the public. Using the case of the development of a metro railway in Delhi, India, it shows that galvanizing public support and attracting patrons to a public transit system stems from creating an all‐round positive image that combines tangible variables with an intangible set of symbolic meanings. Of course, image is only an impression, and does not necessarily reflect reality. In this light, the final section of this article examines the broad physical and societal implications of the metro development in Delhi, and uncovers the driving forces behind the project. The article concludes that, in spite of the cultivation of a positive image, the specific metro form that was developed in Delhi to satisfy each of the special interest groups involved in its production might be specifically one that fails to suit the transportation needs of the city.     

On Optimal Lifetime Redistribution Policy

In this paper, we examine various aspects of the optimal lifetime redistribution policy within a cohort. We characterize the optimal tax policy when society consists of individuals who do not differ only in productivity, but also in time preference. We extend Diamond's analysis on nonlinear taxation of savings into the three-type and four-type models. To gain a better understanding of the lifetime redistribution, the problem is also solved numerically. Our results provide a rationale for distortions (upward and downward) in savings behavior in a simple two-period model where high-skilled and low-skilled individuals have different nonobservable time preferences beyond their earning capacity. If we interpret our model so that instead of private savings there is public provision of pension in the second period, then in the three-type model, we find a nonmonotonic pattern of the replacement rates. The numerical results suggest that retirement consumption is less dispersed than the first-period consumption in a paternalistic case. Paternalistic government policy also increases second-period consumption compared to the welfarist case.     

RELATIVITY,INEQUALITY, AND OPTIMAL NONLINEAR INCOME TAXATION

How does concern for consumption relative to others (“relativity”) affect the structure of optimal nonlinear income taxation? Our article provides three sets of answers to this general question. First, it supports the conclusion in the literature that relativity leads to higher marginal tax rates. In doing so, it both generalizes some of the conditions under which this result is obtained in the literature and fleshes out the detailed structure for optimal marginal tax rates for specific functional forms for distribution, utility function, and social welfare function. Second, the article goes beyond the literature and examines the impact of relativity on the progression of optimal marginal tax rates. By and large, we find support for greater progressivity, defined as the steepness of the rise of the marginal tax rate schedule, as relativity concern increases. Third, none of the papers in the literature, to our knowledge, examines the interplay of relativity and inequality in determining the optimal structure of income taxes. Our special analytical cases and more general numerical calculations support the conclusion that higher inequality dampens the positive impact of greater relativity on the level and the progression of marginal tax rates. More work is needed to further explore this interaction between relativity and inequality that our analysis has uncovered.     

Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions

We contribute to the debate on the optimal design of multiunit auctions by developing and testing robust implications of the leading theory of uniform price auctions on the bid distributions submitted by individual bidders. The theory, which emphasizes market power, has little support in a data set of Finnish Treasury auctions. A reason may be that the Treasury acts strategically by determining supply after observing bids, apparently treating the auctions as a repeated game between itself and primary dealers. Bidder behavior and underpricing react to the volatility of bond returns in a way that suggests bidders adjust for the winner's curse.     

Return Seasonalities

A strategy that selects stocks based on their historical same‐calendar‐month returns earns an average return of 13% per year. We document similar return seasonalities in anomalies, commodities, and international stock market indices, as well as at the daily frequency. The seasonalities overwhelm unconditional differences in expected returns. The correlations between different seasonality strategies are modest, suggesting that they emanate from different systematic factors. Our results suggest that seasonalities are not a distinct class of anomalies that requires an explanation of its own, but rather that they are intertwined with other return anomalies through shared systematic factors.     

Sensation Seeking, Overconfidence, and Trading Activity

This study analyzes the role that two psychological attributes—sensation seeking and overconfidence—play in the tendency of investors to trade stocks. Equity trading data from Finland are combined with data from investor tax filings, driving records, and mandatory psychological profiles. We use these data, obtained from a large population, to construct measures of overconfidence and sensation seeking tendencies. Controlling for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, we find that overconfident investors and those investors most prone to sensation seeking trade more frequently.     

Formative Experiences and Portfolio Choice: Evidence from the Finnish Great Depression

We trace the impact of formative experiences on portfolio choice. Plausibly exogenous variation in workers’ exposure to a depression allows us to identify the effects and a new estimation approach makes addressing wealth and income effects possible. We find that adversely affected workers are less likely to invest in risky assets. This result is robust to a number of control variables and it holds for individuals whose income, employment, and wealth were unaffected. The effects travel through social networks: individuals whose neighbors and family members experienced adverse circumstances also avoid risky investments.