We study the role of risk preferences and frictions in portfolio choice using variation in 401(k) default options. Patterns of active choice in response to different default funds imply that, absent participation frictions, 94% of investors prefer holding stocks, with an equity share of retirement wealth declining with age—patterns markedly different from observed allocations. We use this quasi-experiment to estimate a life cycle model and find a relative risk aversion of 2, EIS of 0.4, and $200 portfolio adjustment cost. Our results suggest that low levels of stock market participation in retirement accounts are due to participation frictions rather than non-standard preferences such as loss aversion.
Authors
- Acknowledgements & Disclosure
- First draft: November 18th, 2021. We thank Hunt Allcott, Joesph Briggs (discussant), Sylvain Catherine (discussant), Nuno Clara, Cary Frydman (discussant), Michael Gallmeyer (discussant), Francisco Gomes (discussant), Debbie Lucas, Joey Malgesini, Christopher Palmer, Jonathan Parker, Akash Raja, Daniel Reck, Antoinette Schoar, Frank Schilbach, Larry Schmidt, Eric So, David Sraer, David Thesmar, Adrien Verdelhan, Toni Whited, Oliver Xie, Geoff Zhang (discussant), two anonymous referees, and audience members at MIT Economics, MIT Sloan, Duke Fuqua, University of Illinois at Urbana-Champaign, Chicago Fed, Princeton, Wharton, Quantbot Technologies, University of South Carolina, Northwestern Kellogg, Minnesota Carlson, Bocconi, and participants at the 2022 NBER Behavioral Finance Spring Meeting, 2022 CEPR Conference on Household Finance, 2022 Western Finance Association Annual Meeting, 2022 Society for Economic Dynamics Annual Meeting, 2022 Texas Finance Festival, Inter-Finance PhD Seminar, and the 2023 AFA Annual Meetings for their insightful comments. We also thank the data provider, a U.S. financial institution, for making available the data used in this paper, helpful discussions, and technical support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32476
- Published in
- United States of America
