Working Paper Series

Does Household Finance Matter? Small Financial Errors with Large Social Costs

Households with familiarity biases tilt their portfolios toward a few risky assets. The resulting mean-variance loss from portfolio underdiversification is equivalent to only a modest reduction of ...

Author(s) :

Harjoat S. Bhamra

Abstract :

Households with familiarity biases tilt their portfolios toward a few risky assets. The resulting mean-variance loss from portfolio underdiversification is equivalent to only a modest reduction of about 1% per year in a household’s portfolio return. However, once we consider also the effect of familiarity biases on the asset-allocation and intertemporal consumption-savings decisions, the welfare loss is multiplied by a factor of four. In general equilibrium, the suboptimal decisions of households distort also aggregate growth, amplifying further the overall social welfare loss. Our findings demonstrate that financial markets are not a mere sideshow to the real economy and that improving the financial decisions of households can lead to large benefits, not just for individual households, but also for society.

Keywords: Portfolio choice, underdiversification bias, growth, social welfare

Link SSRN

Date : 17/09/2018
Working Paper Number: WP-18-004

See Also

Upcoming EDHEC PhD in Finance Forum
News
- 30-04-2019
On June 4, 2019, in London, the third edition of the EDHEC PhD in Finance Forum will...
PhD Studies: an instrument for disruption!
News
- 26-04-2019
EDHEC PhD in Finance Newsletter - April 2019  Editorial written by Abraham Lioui, PhD...
Excellent harvest for Household Finance specialist Professor Kim Peijnenburg!
News
- 22-04-2019
Kim Peijnenburg who joined EDHEC Business School in September 2018 as Professor of...
EDHEC Speakers at QuantMinds INTERNATIONAL Conference
News
- 15-04-2019
This May, the world's leading quantitative finance conference will bring together...