Non-Expected Utility, Saving and Portfolios

Despite increased stockholding opportunities, standard expected-utility models overpredict household participation and stock holdings. It has been suggested that departures from expected utility could resolve both puzzles. We investigate three measurable departures: (i) Kreps-Porteus preferences, (ii) Yaari's Dual Theory, and (iii) Quiggin's Rank-dependent Utility. Improvements tend to occur in predicted portfolio composition rather than participation. They are limited under (i), questionable under (ii), and more sizeable under (iii). Contrary to priors in the literature, improvements under (iii) do not result from solutions at kinks of indifference curves. We conclude that stockholding puzzles are unlikely to be resolved through preferences alone.     

Portfolio Choice and Liquidity Constraints*

We study the infinite‐horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle. We show why the puzzle is robust to several model variations, and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution. We find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because, for a plausible range of parameter values, households can achieve desired consumption smoothing with small or zero holdings of stocks. Such costs could arise from informational considerations, sign‐up fees, and investor inertia.     

Has Greater Stock Market Participation Increased Wealth Inequality in the Us?

Is wider access to stockholding opportunities related to reduced wealth inequality, given that it creates challenges for small and less sophisticated investors? Counterfactual analysis is used to study the influence of changes in the U.S. stockholder pool and economic environment, on the distribution of stock and net household wealth during a period of dramatic increase in stock market participation. We uncover substantial shifts in stockholder pool composition, favoring smaller holdings during the 1990s upswing but larger holdings around the burst of the Internet bubble. We find no evidence that widening access to stocks was associated with reduced net wealth inequality.     

Equity culture and household behavior

Equity culture has spread among households on both sides ofthe Atlantic. We study likely effects of equity culture on thebehavior of households entering the stock market. Without borrowingconstraints, the improved prospects arising from the equitypremium tend to dominate the increase in riskiness of futureincome streams. This encourages entrants to increase consumption,borrowing, and precautionary wealth accumulation, and to reducenet financial wealth. Whether borrowing-constrained entrantswill tend to increase consumption depends on risk aversion andon constraint tightness. Borrowing constraints can reduce, eliminate,or reverse the tendency of entrants to hold larger precautionarywealth buffers.