Ignorance, Fixed Costs, and the Stock Market Participation Puzzle

Alberto Naudon () and Matias Tapia

No 252, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: While the existence of fixed costs in entering asset markets is the leading rationalization of the "participation puzzle" -the fact that most households do not hold stocks, despite the diversification gains and the significant risk-premium involved-, most motivations of these fixed costs are as incompatible with conventional portfolio theory as the non participation itself. Nevertheless, we believe that these motivations are empirically correct, and thus we are forced to explore alternatives to conventional portfolio theory. We find in Choquet expected utility theory a tool that is better equipped to deal with more complex forms of ignorance than expected utility is. Within such model, we are able to express the idea that staying out of the market may be a rational response to the own ignorance. Within a Probit model for the 2001 Survey of Consumer Finances, we show suggestive evidence in its favor

Keywords: non additive beliefs; ambiguity; ignorance; asset market participation. (search for similar items in EconPapers)
JEL-codes: D83 G11 G12 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (6)

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Working Paper: Ignorance, Fixed Costs, and the Stock-Market Participation Puzzle (2004)
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