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

Andrew Conlin

University of Oulu, Department of Economics, Accounting and Finance

Niilo Luotonen

Aalto University School of Business

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 ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Andrew Conlin

University of Oulu, Department of Economics, Accounting and Finance ( email )

Niilo Luotonen

Aalto University School of Business ( email )

P.O. Box 21210
Helsinki, 00101
Finland
+358505394564 (Phone)

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