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Using data from the US Health and Retirement Study, we study the causal effect of increased health insurance coverage through Medicare and the associated reduction in health-related background risk on financial risk-taking. Given the onset of Medicare at age 65, we identify our effect of interest using a regression discontinuity approach. We find that getting Medicare coverage induces stockholding for those with at least some college education, but not for their less-educated counterparts. Hence, our results indicate that a reduction in background risk induces financial risk-taking in individuals for whom informational and pecuniary stock market participation costs are relatively low.
We examine the relationship between household wealth and self-control. Although self-control has been linked to consumption and financial behavior, its measurement remains an open issue. We employ a definition of self-control failure that follows literature in psychology, suggesting that three factors can render self-control defective: lack of planning, lack of monitoring, and lack of commitment to pre-set plans. Our measure combines those three ingredients and can be computed using a standard representative survey. We find that self-control failure is strongly associated with different household net wealth measures and with self-assessed financial distress.
The Eurozone fiscal crisis has created pressure for institutional harmonization, but skeptics argue that cultural predispositions can prevent convergence in behavior. Our paper derives a robust cultural classification of European countries and utilizes unique data on natives and immigrants to Sweden. Classification based on genetic distance or on Hofstede’s cultural dimensions fails to identify a single ‘southern’ culture but points to a ‘northern’ culture. Significant differences in financial behavior are found across cultural groups, controlling for household characteristics. Financial behavior tends to converge with longer exposure to common institutions, but is slowed down by longer exposure to original institutions.
Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We examine the role of social influences on debt culture, emanating from perceived average income of peers. Utilizing unique information from a household survey representative of the Dutch population, that circumvents the issue of defining the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing, especially among those who consider themselves poorer than their peers; and on indebtedness, suggesting a link to financial distress. We employ a number of approaches to rule out spurious associations and to handle correlated effects.
In total, this dissertation comprises three research papers. Objective of all of these papers are to detect mistakes of private investors when conducting mutual funds investments and to analyze the implications. Moreover, the question is addressed whether financial advisors help private investors to avoid these investment mistakes. All three research papers use the same data base which has been provided by a German online brokerage house. The detailed data set allows contributing to existing literature on mutual fund investments, smart decision making, household finance as well as financial advice on an investor- and transaction-specific level. The first paper addresses the question which particular decision criteria private investors use when purchasing mutual funds. It can be shown that funds volume is the dominating decision criterion, whereas historical performance is only of minor importance. As performance persistence exists in the underlying data set, it can be concluded that the majority of investors make investment mistakes. In the second paper it is shown that smart investors, i.e. investors who purchase mutual funds by chasing historical performance, are older, wealthier, more experienced and less likely to be overconfident. In addition, it can be verified that there exists a positive impact of the ability to select mutual funds by chasing historical performance on the overall investment success. Hence, the quality of mutual fund selection ability is an ex-ante measure for investment success. Finally, the third paper analyzes the influence of financial advice on mutual fund decision making of private investments. Evidence can be provided that financial advisors do not help their customers to purchase mutual funds by chasing historical performance. In fact, advisors recommend high-volume mutual funds from well-known fund families. Apparently, financial advisors are much more salesmen than real advisors. These results hold when controlling for potential endogeneity issues.