What Drives Investors to Chase Returns?

64 Pages Posted: 25 May 2021

See all articles by Valentina Michelangeli

Valentina Michelangeli

Bank of Italy

Jonathan Huntley

University of Pennsylvania - Penn Wharton Budget Model

Felix Reichling

Penn Wharton Budget Model

Date Written: April 22, 2021

Abstract

We use data on one-participant retirement savings plans to identify a behavioral bias in savings decisions. Investors who earn top-decile returns increase contributions to their accounts more than other investors. Using characteristics of the investors, characteristics of their retirement savings accounts, and multivariate regression analysis, we first show that such ``return chasing'' behavior is robust to controls for financial illiteracy, macroeconomic conditions, learning, transaction costs, housing prices, and informational frictions. We then use a structural two-asset model with tax-deferred and taxable assets to show that a permanent increase in expected returns produces investment responses for younger or liquidity-constrained investors that are consistent with our data. Our results provide evidence that younger investors' recent portfolio experiences have highly persistent effects on their expectations.

Keywords: household finance, retirement saving, life-cycle

JEL Classification: D14, G4

Suggested Citation

Michelangeli, Valentina and Huntley, Jonathan and Reichling, Felix, What Drives Investors to Chase Returns? (April 22, 2021). Bank of Italy Temi di Discussione (Working Paper) No. 1334, Available at SSRN: https://ssrn.com/abstract=3852817 or http://dx.doi.org/10.2139/ssrn.3852817

Valentina Michelangeli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Jonathan Huntley

University of Pennsylvania - Penn Wharton Budget Model ( email )

440 1st Street NW
Suite 810
Washington, DC 20001
United States

Felix Reichling

Penn Wharton Budget Model ( email )

440 1st Street NE
Suite 810
Washington, DC 20001
United States

HOME PAGE: http://www.budgetmodel.wharton.upenn.edu/

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