The Flypaper Effect in Individual Investor Asset Allocation

42 Pages Posted: 25 Jan 2008

See all articles by James J. Choi

James J. Choi

Yale School of Management; National Bureau of Economic Research (NBER)

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Brigitte C. Madrian

Brigham Young University Marriott School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 21, 2007

Abstract

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.

Keywords: asset allocation, 401(k), employee contributions

Suggested Citation

Choi, James J. and Laibson, David I. and Madrian, Brigitte C., The Flypaper Effect in Individual Investor Asset Allocation (November 21, 2007). Yale ICF Working Paper No. 08-06. Available at SSRN: https://ssrn.com/abstract=1086444

James J. Choi (Contact Author)

Yale School of Management ( email )

135 Prospect Street
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National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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David I. Laibson

Harvard University - Department of Economics ( email )

Littauer Center
Room M-14
Cambridge, MA 02138
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617-495-8570 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Brigitte C. Madrian

Brigham Young University Marriott School of Business ( email )

Provo, UT 84602
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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