What Drives the Heterogeneity in Portfolio Choice? The Role of Institutional, Traditional, and Behavioral Factors

57 Pages Posted: 12 Oct 2016 Last revised: 11 Sep 2019

See all articles by Markku Kaustia

Markku Kaustia

Aalto University School of Business

Andrew Conlin

University of Oulu

Niilo Luotonen

Hanken Centre for Corporate Governance

Date Written: September 9, 2019

Abstract

We analyze household stock market participation and allocation in a survey covering 19 European countries. We jointly control for all relevant variables from prior studies, which typically focus on one at a time, and omit risk-aversion. Excellent full model predictive power decomposes into institutional (country) fixed effects (30%), traditional individual-level variables (50%), and more recently identified behavioral variables (20%), and a single latent factor captures 93% of total explanatory power. We sketch a hierarchical framework where factors’ effects vary by agents’ proneness to participate. We also challenge and complement existing interpretations given to IQ, sociability, trust, and life experiences.

Keywords: Household Finance, Portfolio Choice, Stock Market Participation, Investments, Risky Share

JEL Classification: D1, D14, G11, G02

Suggested Citation

Kaustia, Markku and Conlin, Andrew and Luotonen, Niilo, What Drives the Heterogeneity in Portfolio Choice? The Role of Institutional, Traditional, and Behavioral Factors (September 9, 2019). Available at SSRN: https://ssrn.com/abstract=2845963 or http://dx.doi.org/10.2139/ssrn.2845963

Markku Kaustia (Contact Author)

Aalto University School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
+3589 4313 8475 (Phone)
+3589 4313 8678 (Fax)

Andrew Conlin

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014
Finland

Niilo Luotonen

Hanken Centre for Corporate Governance ( email )

Hanken School of Economics
Helsinki
Finland

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