What drives investors to chase returns?

Jonathan Huntley (), Valentina Michelangeli and Felix Reichling
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Jonathan Huntley: Penn Wharton Budget Model, The Wharton School, University of Pennsylvania

No 1334, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We use data on one-participant retirement savings plans to identify a behavioral bias in savings decisions. Investors who earn top-decile returns increase contributions to their accounts more than other investors. Using characteristics of the investors, characteristics of their retirement savings accounts, and multivariate regression analysis, we first show that such ``return chasing'' behavior is robust to controls for financial illiteracy, macroeconomic conditions, learning, transaction costs, housing prices, and informational frictions. We then use a structural two-asset model with tax-deferred and taxable assets to show that a permanent increase in expected returns produces investment responses for younger or liquidity-constrained investors that are consistent with our data. Our results provide evidence that younger investors' recent portfolio experiences have highly persistent effects on their expectations.

Keywords: household finance; retirement saving; life-cycle (search for similar items in EconPapers)
JEL-codes: D14 G4 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-cwa and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1334_21

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