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Behavioral finance
In this section, the reports deal with articles on behavioral finance: the assumptions, the models, the empirical studies etc..It is one of the most actively researched field in finance.

Simplification and saving

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SIMPLIFICATION AND SAVING

1.Introduction
The paper, authored by John Beshears, James J. Choi, David Laibson and Brigitte C. Madrian, evaluates a low-cost intervention created to simplify the retirement saving decision. Financial decisions, such as choosing a savings rate or asset allocation, are complex and individuals try to postpone confronting these difficult decisions. Even a small delay in saving for retirement can lead to considerable reductions in long-run wealth accumulation.

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The Flypaper Effect in Individual Investor Asset Allocation

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The Flypaper Effect in Individual Investor Asset Allocation

In the paper, James J. Choi, David Laibson and Brigitte C. Madrian, confirm the flypaper effect in asset allocation. The authors find that ‘money sticks where it hits’ viz. investors given securities in kind hold onto those securities for a long time. The authors study a firm that twice changed the rules governing the securities in which its 401(k) matching contributions would be initially invested. In both of these rule changes, employees were always free to immediately reallocate their match account balances. However, it is found that most employees neither reallocate their match balances, nor offset employer-initiated changes in the match allocation by adjusting the allocation of their own contributions.

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Reinforcement Learning and Investor Behavior

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Reinforcement Learning and Investor Behavior 

In this paper, James J. Choi, David Laibson, Brigitte C. Madrian and Andrew Metrick demonstrate how investors tend to chase returns and avoid variance with respect to their idiosyncratic 401(k) returns history. If an investor realizes higher returns from his asset allocation within 401(k), then he may decide to increase his 401(k) contributions on the basis of this rationally learned skill. Consequently, this may induce the investor to hold mutual funds that have recently performed well. The authors prove naïve reinforcement learning heuristic i.e. investors expect that investments in which they personally experienced past success will be successful in the future as well, whether or not such a belief is logically justified. Even though, returns chasing and variance avoidance reduces with age, investors continue to follow the above heuristics in their sixties. 

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Inexperienced Investors and Bubbles

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Inexperienced Investors and Bubbles

I.Introduction

The paper, by Robin Greenwood and Stefan Nagel, compare the portfolio holdings and returns of young and old mutual fund managers during and after the technology stock bubble. Around the peak of the bubble, younger mutual funds managers more heavily invested in technology stocks than their older counterparts. Younger managers increased their technology holdings following quarters in which technology stocks experience high returns, while older managers did not. These young managers, but not old managers, followed trends for their technology stock investments. The authors also explain how inexperienced investors play a major role in creating asset price bubbles. These investors usually underestimate the prospects of declining stock prices and become more than willing to buy high-priced stocks.

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Neighbors Matter: Causal Community Effects and Stock Market Participation

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Neighbors Matter: Causal Community Effects and Stock Market Participation

The paper, by Jeffery R. Brown, Zoran Ivković, Paul A. Smith, and Scott Weisbenner, confirms the causal association between an individual’s decision whether to own stocks and average stock market participation of that individual’s community. The authors demonstrate that word of mouth drives this causal effect and how the results are stronger in more sociable communities. In addition, the authors instrument for the average ownership within each native individual’s community with the average ownership of the birth states of “nonnative” neighbors (those born in different community and state). 
I. Data
A. The Panel of U.S. Taxpayers
The authors introduce tax data by utilizing a large panel of tax returns from 1987 to 1996. This tax data enables them to get hold of taxpayers’ geographical information to assign them to their respective community as well as identify the birth states of the individual.
B. Measuring Equity Ownership
The authors measure equity ownership by capturing all dividends from stocks and taxable equity mutual funds.
C. Defining “Community”
The authors define the individual’s community as the MSA (Metropolitan Statistical Area) in which the individual resides.
D. Summary Statistics
The authors provide statistics regarding equity ownership and individual specific-characteristics.
II. The Challenge of Establishing Causality
It is observed that an individual’s equity market participation decision is influenced by the equity market participation of other individuals in the community.
III. Establishing Causality: Methodology
A. Overview of Identification Strategy
The authors instrument for the ownership of the native individual of community with the average birth-state ownership of their nonnative neighbors.
B. The First-Stage Regression
The correlation between equity ownership in a community and the above instrument is depicted.
IV. Instrumental Variable Results
A. Core Specification
The authors provide the core specification set of results using their instrumental variables strategy.
B. Core Result
The authors confirm that there are causal word-of-mouth community effects.
C. Interaction of Community Effect with “Sociability”
It is shown that a word-of-mouth channel is likely to be stronger in those communities in which individuals are more likely to interact socially with their neighbors.
D. Economic Significance
The authors interpret the magnitude of community effects by comparing the effect of a change in the average participation rate of one’s community.
V. Conclusion
The authors conclude that causal community significantly affects stock market participation. Besides, an initial increase in the average stock ownership level in a community may cause the other individuals to begin participating in the stock market as well.

Brown, Jeffrey R., Smith, Paul A., Ivkovich, Zoran and Weisbenner, Scott J., "Neighbors Matter: Causal Community Effects and Stock Market Participation" (May 27, 2007). Available at SSRN: http://ssrn.com/abstract=966334

 
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