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http://ssrn.com/abstract=1216163
 
 

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Do Behavioral Biases Adversely Affect the Macro-Economy?


George M. Korniotis


University of Miami

Alok Kumar


University of Miami - School of Business Administration

September 14, 2010

Review of Financial Studies, Forthcoming

Abstract:     
We investigate whether the adverse effects of investors’ behavioral biases extend beyond the domain of financial markets to the broad macro-economy. Focusing on the income risk-sharing role of financial markets, we find that risk-sharing is higher (more than double) in U.S. states where investors are more sophisticated and exhibit weaker behavioral biases. The potential for risk-sharing varies geographically but states with better risk-sharing opportunities are able to achieve higher levels of risk sharing only when investors in those states are more sophisticated. Collectively, these results indicate that investors’ aggregate behavioral biases and their lack of financial sophistication adversely affect the local macroeconomy.

Number of Pages in PDF File: 72

Keywords: Risk sharing, income risk, financial markets, cognitive abilities, behavioral biases, investor sophistication

JEL Classification: E10, G11, G12

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Date posted: August 11, 2008 ; Last revised: September 17, 2010

Suggested Citation

Korniotis, George M. and Kumar, Alok, Do Behavioral Biases Adversely Affect the Macro-Economy? (September 14, 2010). Review of Financial Studies, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1216163 or http://dx.doi.org/10.2139/ssrn.1216163

Contact Information

George M. Korniotis
University of Miami ( email )
P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)
Alok Kumar (Contact Author)
University of Miami - School of Business Administration ( email )
514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)
HOME PAGE: http://moya.bus.miami.edu/~akumar
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