We calculate the socially optimal level of illiquidity in an economy populated by households with taste shocks and present bias (Amador, Werning, and Angeletos 2006). The government chooses mandatory contributions to respective spending/savings accounts, each with a different pre-retirement...

Optimal investment of firms implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of...

Do financial advisers undo or reinforce the behavioral biases and misconceptions of their clients? We use an audit methodology where trained auditors meet with financial advisers and present different types of portfolios. These portfolios reflect either biases that are in line with the financial...

We provide new empirical evidence suggesting that the marginal investor in mutual funds behaves differently across market conditions. If the marginal investor allocates capital across mutual funds rationally, then the relative performance of funds should be unpredictable. We find however that...

We find that several recently proposed consumption-based models of stock returns, when evaluated using an optimal set of managed portfolios and the associated model-implied conditional moment restrictions, fail to capture key features of risk premiums in equity markets. To arrive at these...

People are more willing to bet on their own judgments when they feel skillful or knowledgeable (Heath and Tversky (1991)). We investigate whether this quot;competence effectquot; influences trading frequency and home bias. We find that investors who feel competent trade more often and have a...

overview of how taxation affects household portfolio structure. It begins by outlining six aspects of portfolio behavior that may be influenced by the tax system. These are asset selection, asset allocation, borrowing, asset location in taxable and tax-deferred accounts, asset turnover, and...

Although international financial markets are highly integrated across the more well-developed countries, investors nevertheless hold portfolios that consist nearly exclusively of domestic assets. This violation of the predictions of standard theories of portfolio choice is known as the...

Barber and Odean (2000) find that households who trade more have a lower net return than others and attribute this pattern to irrationality, particularly overconfidence. In contrast, we find that household financial choices generated from a dynamic optimization problem with rational agents and...