Prioritizing Needs and Household Investments

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