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Inside Cornell Luncheon Vicki Bogan, Ph.D. Assistant Professor Dept. of Applied Economics and Management April 28,
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Do not cite without permission of the author.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 What Affects Household Financial Decision Making? Decision Making? © 2009 Copyright by

What Affects Household Financial

What Affects Household Financial

Decision Making?

Decision Making?

What Affects Household Financial What Affects Household Financial Decision Making? Decision Making? © 2009 Copyright by
What Affects Household Financial What Affects Household Financial Decision Making? Decision Making? © 2009 Copyright by

© 2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

What Affects Household Financial What Affects Household Financial Decision Making? Decision Making? © 2009 Copyright by
Focus of Talk • Research – Why is Understanding Financial Decision Making Important? (So What) –

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

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Do not cite without permission of the author.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 cu rrent financial crisis residential

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Do not cite without permission of the author.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 Making Importan t? Understanding what actually influences Understanding what actually influences

Why Is Understanding Financial Decision Making Important?

Understanding what actually influences

Understanding what actually influences

household financial decision making

household financial decision making

processes isis important

processes

important toto academics, policy

academics, policy

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Why Is Understanding Financial Decision Making Importan t? Understanding what actually influences Understanding what actually influences
Why Is Understanding Financial Decision Making Importan t? Understanding what actually influences Understanding what actually influences
Why Is Understanding Financial Decision Making Importan t? Understanding what actually influences Understanding what actually influences
Why Is Understanding Financial Decision Making Importan t? • Academics – reconcile theory with real world

Why Is Understanding Financial Decision Making Important?

• 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 • Market Frictions (What effects do fees and taxes really have on

Main Themes for Today

• Market Frictions (What effects do fees and taxes really have on household finance decisions?) Do
• 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?
Household Portfolio Choice Effects Due To:
Household Portfolio Choice Effects Due To:

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” –

Financial Decision Making Research

Portfolio Choice and Market Frictions “Stock Market Participation and the Internet” – Journal of Financial and
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,

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 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

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 transaction costs 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* 1995 Service

Stock Market Participation and the Internet

The change in trading patterns was quite dramatic*

1995 Service Ctr., Branch Offices, & Other Trades Telebroker & Phone Trades On-line Trades Year 2002
1995
Service Ctr., Branch Offices, & Other Trades
Telebroker & Phone Trades
On-line Trades
Year
2002
2001
2000
1999
1998
1997
1996
0.0
Percent of Total Daily Avg. Trades
10.0
20.0
30 .0
40.0
50.0
60.0
70.0
80.0
90.0

*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 t hat computer/Internet usage increases stock

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”

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.

© 2009 Copyright by Vicki Bogan. College Savings Plan Market” – AEM Working Paper “Savings Incentives
© 2009 Copyright by Vicki Bogan.
College Savings Plan Market” – AEM Working Paper
“Savings Incentives and Prices: A Study of the 529
Do not cite without permission of the author.
#2008-10
Savings Incentives and Prices: A Study of the 529 College Savings Plan Market • Internal Revenue

Savings Incentives and Prices: A Study of the 529 College Savings Plan Market

Internal Revenue

Code

529

Economic Growth

and Tax Relief

Reconciliation Act

Enacted to encourage parental saving for college Create an investment vehicle that would
Enacted to
encourage
parental saving
for college
Create an
investment
vehicle that
would

© 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 • Exponentially rising

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

29

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

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 “Portfolio Choice and Mental Health” – Work

Financial Decision Making Research

Portfolio Choice and Behavioral Biases

“Portfolio Choice and Mental Health” – Work in “Investment Decisions and Offspring Gender” – AEM Working
“Portfolio Choice and Mental Health” – Work in
“Investment Decisions and Offspring Gender” – AEM
Working Paper #2009-08

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

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 in creases the probability of holding

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

Other Research Interests and Topics

• Corporate Financial Decision Making

– Merger and Acquisition Behavior

“What Drives Merger Decision Making Behavior?

Don’t Seek, Don’t Find, and Don’t Change Your

Mind” – forthcoming in the Journal of Economic

Behavior and Organization

• Microfinance

– Capital Structure Decisions

© 2009 Copyright by Vicki Bogan.

Do not cite without permission of the author.

Implications • Academics – Model certain frictions (transaction costs) and biases to help improve theory and

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 • Information is key. Do your homework choices” What Should Households Do?

Take-Aways: Household Portfolio Choice

• Information is key. Do your homework choices” What Should Households Do? • Understanding potential for
• Information is key. Do your homework
choices”
What Should Households Do?
• Understanding potential for bias is
important for making “conscience
Contact Information Vicki Bogan, Ph.D. Assistant Professor 454 Warren Hall Cornell University Ithaca, NY 14853 (607)

Contact Information

Vicki Bogan, 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
Thank You