Imperfect decisions or untapped potential: Indicators of U.S. household investment efficiency
Abstract
Household investment decisions are dynamic, challenging, and have significant impacts on household investment and retirement prospects. Even though this research and previous literature demonstrates the inefficiency of U.S. household portfolios, little research has focused on the differences in household composition and characteristics that might explain patterns of inefficiency. This thesis addresses that possibility directly, utilizing a two-stage approach to examine the relationship between measured household investment efficiency and variability in household demography. The first stage estimates the efficient investment frontier using data from the Survey of Consumer Finances (SCF). The frontier estimation shows that the measured mean-variance inefficiency (i.e. the distance from the frontier) varies across the sample (13.2% and 5.8% of households are at least one and two standard deviations from efficient respectively). This variability leads to the second stage analysis where differences in household characteristics are correlated to a household's inefficiency metric. In addition to detailed investment reporting, the SCF reports an extensive set of household level variables (e.g. age or education level). Previous research in household economics has pointed to the differential effects of these characteristics in explaining household economic decisions. Similarly, the second stage model assumes that these characteristics will have influence in household investment decisions and the resulting efficiency of the chosen portfolio. The second stage model tests this assumption and identifies strong correlation between a number of household variables and household inefficiency. The results suggest that highly educated, financially sophisticated, and consultative households are more efficient investors. Financial sophistication is indicated through higher incomes, efficiency gains from homeownership, and lower debt balances. Investment in planning via financial software and professional advice also improve efficiency. Examination of life cycle effects surprisingly indicates a U-shaped age and efficiency relationship. This thesis adds an important dimension to the household economics literature through previously unexamined demographic indicators and has broader applied implications by focusing on the household financial portfolios. An improved understanding of factors that lead to inefficiency offers better guidance on potential remedial activities for households or policy makers. The results also point to potential demand for further service offerings by financial professionals.
Degree
M.S.
Advisors
Keeney, Purdue University.
Subject Area
Finance
Off-Campus Purdue Users:
To access this dissertation, please log in to our
proxy server.