Down or out: Assessing the welfare costs of household investment mistakes

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Publication Details

Output type: Journal article

Author list: Calvet LE, Campbell JY, Sodini P

Publisher: The University of Chicago Press

Publication year: 2007

Journal: Journal of Political Economy (0022-3808)

Volume number: 115

Issue number: 5

Start page: 707

End page: 747

Number of pages: 41

ISSN: 0022-3808

eISSN: 1537-534X

Languages: English-Great Britain (EN-GB)

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Open access status: green

Full text URL: http://www.nber.org/papers/w12030.pdf

Abstract

This paper investigates the efficiency of household investment decisions using comprehensive disaggregated Swedish data. We consider two main sources of inefficiency: underdiversification ("down") and nonparticipation in risky asset markets ("out"). While a few households are very poorly diversified, most Swedish households outperform the Sharpe ratio of their domestic stock index through international diversification. Financially sophisticated households invest more efficiently but also more aggressively, and overall they incur higher return losses from underdiversification. The return cost of nonparticipation is smaller by almost one-half when we take account of the fact that nonparticipants would likely be inefficient investors.

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