Why Do so Few Hold Stocks?
Posted: 2 May 2000
We investigate why the majority of United States households do not hold stocks despite the equity premium and predictions of expected-utility models. The question is relevant for privatisation, asset pricing, and tax progressivity issues. We show that risk aversion per se, heterogeneity of beliefs, habit persistence, time nonseparability, and quantity constraints on borrowing do not account for the phenomenon. A wedge between borrowing and lending rates, and minimum-investment requirements are plausible but empirically weak factors. More promising explanations are inertia and departures from expected- utility maximization. There is also qualified support for nondiversifiable income risk as a contributing factor.
JEL Classification: G11, E44
Suggested Citation: Suggested Citation