Prioritizing Needs and Household Investments

61 Pages Posted: 6 Nov 2020 Last revised: 19 Aug 2022

See all articles by John C. Chu

John C. Chu

Monash University

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh

Date Written: October 9, 2020

Abstract

We propose prioritizing needs to explain household investments. Our analysis isolates and analyzes the consumption of luxury goods from theories of economics, psychology, and sociology. Risky investment is one of the hierarchical needs of the household, but prioritizing psychological satisfaction could outweigh the former. Additionally, households borrow to maintain a luxury lifestyle. Lack of reserves can force a household to withdraw invested assets. Our analysis predicts that a household with higher reserves could tolerate lower returns, and weak tolerance leads to withdrawals. Empirical analysis confirms the flow differences in which fixed income mutual funds hold high- or low-risk assets.

Keywords: Household Finance; Limited Participation; Condition for Mean-Variance Optimization; Fixed-Income Mutual Fund; Fund Flows

JEL Classification: D14, G12, G20, G23, G50, G51

Suggested Citation

Chu, John Chung-Yen and Leung, Woon Sau, Prioritizing Needs and Household Investments (October 9, 2020). Available at SSRN: https://ssrn.com/abstract=3720229 or http://dx.doi.org/10.2139/ssrn.3720229

John Chung-Yen Chu (Contact Author)

Monash University ( email )

Department of Banking and Finance
Caufield East, Victoria 3145
Australia
61-3-9903-4546 (Phone)

HOME PAGE: http://johnchungyenchu.org/

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

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