The Flypaper Effect in Individual Investor Asset Allocation
James J. Choi
Yale School of Management; National Bureau of Economic Research (NBER)
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Brigitte C. Madrian
Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)
November 21, 2007
Yale ICF Working Paper No. 08-06
We document a flypaper effect in asset allocation: securities received in kind "stick where they hit." We study a firm that twice changed the rules governing the securities in which its 401(k) matching contributions were initially invested. Both of these rule changes were economically neutral: employees were always free to immediately reallocate their match account balances. However, we find that most employees neither reallocate their match balances, nor offset employer-initiated changes in the match allocation by adjusting the allocation of their own contributions. Consequently, these rule changes caused dramatic shifts in participants' 401(k)portfolio risk. After examining several alternative explanations for this flypaper effect, we conclude that it is largely due to a combination of passivity and mental accounting.
Number of Pages in PDF File: 42
Keywords: asset allocation, 401(k), employee contributionsworking papers series
Date posted: January 25, 2008
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