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Inside Cornell Luncheon

Vicki Bogan, Ph.D.


Assistant Professor
Dept. of Applied Economics and Management

April 28, 2009


2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

What Affects Household Financial


Decision Making?

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Focus of Talk
Research
Why is Understanding Financial Decision Making
Important? (So What)
Main Themes for Today
Specific Financial Decision Making Research Projects
Other Research Interests and Topics
p
Implications
Concluding Remarks
2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Why Is Understanding Financial Decision


Making Important?
Epicenter of the current financial crisis residential
mortgage market
Financial decisions that households made with respect to
purchasing and financing their homes

Other household financial decisions also have a


significant affect on the economy

Investing in stocks
Buying bonds
Saving
Accumulating credit card debt

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Why Is Understanding Financial Decision


M ki IImportant?
Making
t t?
Understanding what actually influences
household financial decision making
processes is important to academics, policy
makers and households alike
makers,

Why Is Understanding Financial Decision


M ki IImportant?
Making
t t?
Academics reconcile theory with real world
Policy Makers shape regulatory environment
Households make good decisions

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Main Themes for Today


Household Portfolio Choice Effects Due To:
Market Frictions (What effects do fees and taxes really
have on household finance decisions?)
Do transaction fees affect stock investing?
Are all 529 Plans worth it?
Behavioral Biases (How do behavioral biases affect
household finance decisions?)
Does the gender of your child(ren) affect your
investment decisions?
2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Financial Decision Making Research


Portfolio Choice and Market Frictions
Stock Market Participation and the Internet Journal of
Financial and Quantitative Analysis. 43 (1), 191-212. March
2008.
Bubbles or Convenience Yields? A Theoretical
Explanation with Evidence from Technology Company
Equity Carve-Outs International Review of Economics
and Finance. 18 (1). March 2009.
Savings Incentives and Prices: A Study of the 529
College Savings Plan Market AEM Working Paper
#2008-10
2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Stock Market Participation and the Internet

Historically, despite the average returns in the


stock market, only between 20%-30% of U.S.
families held stock. This proportion was
remarkably stable through time

However, recently we have observed a


However
significant increase in the percentage of
households that participate in the stock market

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Stock Market Participation and the Internet


The creation and growth of the Internet has provided an
important change to the method by which investors can
participate in the stock market
The Internet has:

Lowered
L
d ttransaction
ti costs
t
Lowered information costs
Made access easier

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Stock Market Participation and the Internet


The change in trading patterns was quite dramatic*
90.0

Percent o
of Total Daily Avg. Trades

80.0
70.0
60.0
50.0
40.0
30 0
30.0
20.0
10.0
0.0
1995

1996

1997

1998

1999

2000

2001

2002

Year
On-line Trades
Telebroker & Phone Trades
Service Ctr., Branch Offices, & Other Trades

*Investor trading data from Charles Schwab Corporation. Leading U.S. brokerage firm with over 8 million active client accounts.

Stock Market Participation and the Internet


Empirical analysis shows that computer/Internet usage
increases stock market participation
In the data, computer usage increases the probability of
owning stock by 6%
Equivalent to having:
over $27,000 in additional household income
over 2 more years of education

Due to some features of the data, the observed effect of


computer usage can be interpreted as the lower limit
when making inferences for the total population
2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Financial Decision Making Research


Portfolio Choice and Market Frictions
Stock Market Participation and the Internet Journal of
Financial and Quantitative Analysis. 43 (1), 191-212. March
2008.
Bubbles or Convenience Yields? A Theoretical
Explanation with Evidence from Technology Company
Equity Carve-Outs International Review of Economics
and Finance. 18 (1). March 2009.
Savings Incentives and Prices: A Study of the 529
College Savings Plan Market AEM Working Paper
#2008-10
2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Savings Incentives and Prices: A Study of


the 529 College Savings Plan Market
Internal Revenue
Code 529
Economic Growth
and Tax Relief
Reconciliation Act

2009 Copyright by Vicki Bogan.

Enacted to

Create an
investment
vehicle that
would
encourage
parental saving
for college

Do not cite without permission of the author.

Savings Incentives and Prices: A Study of


the 529 College Savings Plan Market
Exponentially rising college education costs
Almost every state has multiple 529 plan options
Expenses charged by fund companies for running 529
programs vary dramatically

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Savings Incentives and Prices: A Study of


the 529 College Savings Plan Market
Analyze the market for 529 plans using a plan level
panel data set of 529 College Savings Plan information
covering the years 2002-2006
Find evidence of limited market competition and a
positive relationship between state tax rates and 529
plan fees
A $100 increase in potential wage benefit from investing
in a 529 plan is associated with a 3-5 basis point
increase in fees for direct sold 529 College Savings
Plans

Financial Decision Making Research


Portfolio Choice and Behavioral Biases
Investment Decisions and Offspring Gender AEM
Working Paper #2009-08
Portfolio
Choice
P tf li Ch
i and
d Mental
M t l Health
H lth Work
W k in
i
Progress

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Investment Decisions and Offspring Gender


Economic research has documented many economic
effects of offspring gender on parental behavior
Open question exists as to whether offspring gender has
any influence on parental investment decision making
Investigate whether female offspring have an impact on
investment decisions with respect to stock and bond
holding

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Investment Decisions and Offspring Gender


Having only female children increases the probability of
holding stock by over 11%
Other children gender variables are not significant

None of the children gender variables significantly


influence bondholding

2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Other Research Interests and Topics


Corporate Financial Decision Making
Merger and Acquisition Behavior
What Drives Merger Decision Making Behavior?
Dont Seek, Dont Find, and Dont Change Your
Mind forthcoming in the Journal of Economic
B h i and
Behavior
dO
Organization
i ti

Microfinance
Capital Structure Decisions
2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

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Implications
Academics
Model certain frictions (transaction costs) and biases to help
improve theory and reconcile theory with real world

Policy Makers
Shape regulatory environment such that policies (e.g.,
consumer tax breaks) provide the intended benefits to
households

Households
Make good decisions by understanding fees associated
with investments and that biases often affect financial
decisions
2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Take-Aways: Household Portfolio Choice


What Should Households Do?
Information is key. Do your homework
Understanding potential for bias is
important for making conscience
choices

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Contact Information
Vicki Bogan,
Bogan Ph.D.
Ph D
Assistant Professor
454 Warren Hall
Cornell University
Ithaca, NY 14853
(607) 254-7219
vlb23@cornell.edu
www.aem.cornell.edu/faculty_sites/bogan

Thank You

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