Investor Sophistication and the Home Bias, Diversification, and Employer Stock Puzzles

29 Pages Posted: 19 Mar 2010

See all articles by Miles S. Kimball

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

Date Written: January 29, 2010

Abstract

Using data from the April 2005 Survey of Consumers, we develop an index of investor sophistication from a set of 14 quiz-like questions. We correlate our measure of sophistication with holdings of international investments, measures of diversification, and holdings of an employer's stock. We find that each of these variables is correlated with sophistication, with more sophisticated investors consistently behaving the way that financial economists would recommend. More sophisticated investors also appear more likely to participate in the stock market. We argue that since sophistication is correlated with each of these anomalous behaviors, the most likely explanation for each behavior is that unknowledgable investors simply make mistakes.

Keywords: Investor Sophistication, Household Finance

JEL Classification: G11

Suggested Citation

Kimball, Miles S. and Shumway, Tyler, Investor Sophistication and the Home Bias, Diversification, and Employer Stock Puzzles (January 29, 2010). Available at SSRN: https://ssrn.com/abstract=1572866 or http://dx.doi.org/10.2139/ssrn.1572866

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
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734-764-2375 (Phone)
734-764-2769 (Fax)

University of Colorado Boulder ( email )

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HOME PAGE: http://www.colorado.edu/Economics/people/faculty/kimball.html

Center for Economic and Social Research, USC ( email )

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Los Angeles, CA 90089-3332
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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Tyler Shumway (Contact Author)

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)

HOME PAGE: http://www.umich.edu/~shumway

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