What Matters to Individual Investors? Evidence from the Horse s Mouth

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Introduction Equity Share Mutual Funds Conclusion What Matters to Individual Investors? Evidence from the Horse s Mouth James J. Choi & Adriana Z. Robertson Yale University & University of Toronto May 12, 2018

Introduction Equity Share Mutual Funds Conclusion Theories of Investor Motives & Beliefs

Introduction Equity Share Mutual Funds Conclusion Theories of Investor Motives & Beliefs Many...

Introduction Equity Share Mutual Funds Conclusion Theories of Investor Motives & Beliefs Many... Ever Multiplying

Introduction Equity Share Mutual Funds Conclusion Testing these Theories is Hard

Introduction Equity Share Mutual Funds Conclusion Testing these Theories is Hard Finding exogenous variation difficult Identification often relies upon rational expectations Estimates from valid IV designs are local average treatment effects, often in special subpopulations Hard to compare effect sizes across studies Predictions of competing models often similar or identical Fundamental assumptions in some leading models hard to directly test Long run risk, rare disasters John Campbell: dark matter for economists

Introduction Equity Share Mutual Funds Conclusion Our Paper We ask 1,098 U.S. individuals in RAND American Life Panel: How well leading academic theories describe their concerns, preferences, and beliefs Topics: Equity share of portfolio Actively managed mutual funds Cross-section of stock returns Sample Design Process Weights Limitations Surveys in Finance

Introduction Equity Share Mutual Funds Conclusion Equity Share

Introduction Equity Share Mutual Funds Conclusion Factor Ratings Stock market participants How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? Stock market non-participants How important are the following factors in causing you to not currently own any stocks? Answer options Not important at all, a little important, moderately important, very important, extremely important Opening Questions

Introduction Equity Share Mutual Funds Conclusion Big Picture We divide the questions into 6 groups: Neoclassical AP Models ground Risks & Assets Social & Personal Nonstandard Preferences Beliefs Other (Heuristics & Transactional)

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Neoclassical AP Models We asked about 9 factors drawn from neoclassical representative agent asset pricing models: Return Covariance with Marginal Utility of Money Return Covariance with Consumption Growth Rare Disaster Risk Consumption Composition Risk Consumption Commitments Risk of Aggregate Consumption over Next Year Risk of Long-Run Aggregate Consumption Risk of Aggregate Consumption Volatility over Next Year Risk of Long-Run Aggregate Consumption Volatility

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Neoclassical ground Factors Social & Personal Rare Disaster Risk Long Run Agg. Cons. Vol. Risk Other Nonstandard Prefs Beliefs Consumption Commitments Cov with MU of Money Agg. Cons. Risk Long Run Agg. Cons. Risk Cov with Cons. Growth Agg. Cons. Vol. Risk Cons. Composition Risk 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion ground Risks & Assets We asked about the importance of 10 risks and assets outside of the stock market: Risk of Illness/Injury Labor Income Risk*** Years until Retirement*** Human Capital Time until Significant Non-Retirement Expense Home Value Risk**** Non-Financial Risk Non-Financial Assets Cushion Losses** Stocks are an Inflation Hedge** Wealth Too Small*

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Wealth Too Small * Time to Retirement *** Illness/Injury Risk Labor Income Risk *** Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs Human Capital Time to Significant Expenditure Inflation Hedge ** Non Financial Risk Non Financial Cushion ** Home Value Risk **** 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Wealth Too Small * Time to Retirement *** Illness/Injury Risk Rare Disaster Risk Labor Income Risk *** Long Run Agg. Cons. Vol. Risk Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs Human Capital Time to Significant Expenditure Consumption Commitments Cov with MU of Money Agg. Cons. Risk Long Run Agg. Cons. Risk Inflation Hedge ** Non Financial Risk Non Financial Cushion ** Cov with Cons. Growth Agg. Cons. Vol. Risk Cons. Composition Risk Home Value Risk **** 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Social & Personal Factors We asked about 11 social & personal factors: Low Trust in Market Participants Lack of Trustworthy Advisor Lack of Knowledge About How to Invest Advice from a Professional Financial Advisor Advice from Peers or Family Advice from Media Experience of Living Through Returns Personal Experience Investing in Stock Market Religion Finance Phobia* Never Got Around to It*

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Finance Phobia * Lack of Trust Lack of Knowledge Experience of Returns Advice, Professional Experience of Investing Religion Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs Lack of Advisor Advice, Media Advice, Peers, Family Never Got Around to It * 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Wealth Too Small * Time to Retirement *** Illness/Injury Risk Rare Disaster Risk Labor Income Risk *** Finance Phobia * Lack of Trust Lack of Knowledge Human Capital Time to Significant Expenditure Consumption Commitments Cov with MU of Money Lack of Advisor Agg. Cons. Risk Long Run Agg. Cons. Risk Experience of Returns Advice, Professional Long Run Agg. Cons. Vol. Risk Experience of Investing Religion Inflation Hedge ** Non Financial Risk Non Financial Cushion ** Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs Cov with Cons. Growth Agg. Cons. Vol. Risk Cons. Composition Risk Home Value Risk **** Advice, Media Advice, Peers, Family Never Got Around to It * 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Other Factors We asked about 5 transactional factors and heuristics: Cash for Routine Expenses Time to Cash 401(k) Default Rule of Thumb Returns Before Birth

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Neoclassical ground Factors Cash for Routine Expenses 401(k) Default Social & Personal Other Nonstandard Prefs Beliefs Time to Cash Returns Before Birth Rule of Thumb 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Wealth Too Small * Time to Retirement *** Illness/Injury Risk Cash for Routine Expenses Rare Disaster Risk Labor Income Risk *** Finance Phobia * Lack of Trust Lack of Knowledge Human Capital Time to Significant Expenditure Consumption Commitments Cov with MU of Money Lack of Advisor Agg. Cons. Risk Long Run Agg. Cons. Risk Time to Cash Cov with Cons. Growth Agg. Cons. Vol. Risk Cons. Composition Risk Home Value Risk **** Experience of Returns Advice, Professional Long Run Agg. Cons. Vol. Risk Experience of Investing 401(k) Default Religion Inflation Hedge ** Non Financial Risk Non Financial Cushion ** Returns Before Birth Advice, Media Rule of Thumb Advice, Peers, Family Never Got Around to It * Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Nonstandard Preferences We asked about 4 non-standard preference based factors: Loss Aversion Ambiguity / Parameter Uncertainty External Habit Internal Habit

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Neoclassical Internal Habit Ambiguity/Parameter Uncertainty ground Factors Social & Personal Other Nonstandard Prefs Beliefs External Habit Loss Aversion 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Wealth Too Small * Time to Retirement *** Illness/Injury Risk Cash for Routine Expenses Rare Disaster Risk Labor Income Risk *** Finance Phobia * Lack of Trust Lack of Knowledge Human Capital Time to Significant Expenditure Consumption Commitments Cov with MU of Money Lack of Advisor Agg. Cons. Risk Long Run Agg. Cons. Risk Time to Cash Cov with Cons. Growth Agg. Cons. Vol. Risk Cons. Composition Risk Home Value Risk **** Loss Aversion Experience of Returns Internal Habit Ambiguity/Parameter Uncertainty Advice, Professional Long Run Agg. Cons. Vol. Risk Experience of Investing 401(k) Default Religion Inflation Hedge ** Non Financial Risk Non Financial Cushion ** External Habit Returns Before Birth Advice, Media Rule of Thumb Advice, Peers, Family Never Got Around to It * Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Expected Return Beliefs We asked about 4 categories of expected return beliefs: Expected Stock Returns Higher than Usual** Expected Stock Returns Lower than Usual Stock Market Returns Mean-Revert Stock Market Returns have Momentum

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs E[R] Lower than Usual E[R] Higher than Usual ** Market Momentum Market Mean Reversion 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Factors Affecting Equity Allocation Equity Allocation Proportion Responding Very or Extremely Important Wealth Too Small * Time to Retirement *** Illness/Injury Risk Cash for Routine Expenses Rare Disaster Risk Labor Income Risk *** Finance Phobia * Lack of Trust Lack of Knowledge Human Capital Time to Significant Expenditure Consumption Commitments Cov with MU of Money Lack of Advisor Agg. Cons. Risk Long Run Agg. Cons. Risk Time to Cash Cov with Cons. Growth Agg. Cons. Vol. Risk Cons. Composition Risk Home Value Risk **** Loss Aversion Experience of Returns Internal Habit Ambiguity/Parameter Uncertainty Advice, Professional Long Run Agg. Cons. Vol. Risk Experience of Investing 401(k) Default Religion E[R] Lower than Usual E[R] Higher than Usual ** Inflation Hedge ** Non Financial Risk Non Financial Cushion ** Market Momentum Market Mean Reversion External Habit Returns Before Birth Advice, Media Rule of Thumb Advice, Peers, Family Never Got Around to It * Neoclassical ground Factors Social & Personal Other Nonstandard Prefs Beliefs 0.1.2.3.4.5 0.05.1.15.2.25 * Non participants only. ** Participants only. *** Employed only. **** Homeowners only.

Introduction Equity Share Mutual Funds Conclusion Actively Managed Mutual Funds

Introduction Equity Share Mutual Funds Conclusion Why Do People Buy Actively Managed Funds? We asked about 4 factors and 2 empirical claims: Higher Returns Hedging Advisor Recommendation Passive Not Available Decreasing Returns to Scale Past Returns are Evidence of Managerial Skill More

Introduction Equity Share Mutual Funds Conclusion Why Do People Buy Actively Managed Funds? Actively Managed Stock Mutual Funds Proportion Responding... Very or Extremely Important Agree or Strongly Agree Higher Returns * Managerial Skill Advisor Recommendation * Hedging * Decreasing Returns Passive not Available * 0.1.2.3.4.5 0.1.2.3.4 * Among respondents who had purchased an actively managed mutual fund at some point in the past.

Introduction Equity Share Mutual Funds Conclusion Conclusion Equity Share Most of the leading academic theories receive non-trivial support. Particular support for: Economic disasters Investment horizon ground risk (health, labor income) Need for cash on hand for routine expenses Fixed costs of stock market participation Finance phobia Complexity PCA

Introduction Equity Share Mutual Funds Conclusion Conclusion Actively Managed Mutual Funds Particular support for: A belief in higher returns Advisor recommendations Non-trivial support for hedging demand Households tend to believe that: Past fund performance is a good signal of stock-picking skill Funds do not suffer from diseconomies of scale

Introduction Equity Share Mutual Funds Conclusion The End

Cross Sectional Factors

Growth Stocks versus Value Stocks Are you familiar with the terms growth stock and value stock? 24% were familiar with both 66% were familiar with neither A value stock is a stock that has a low price relative to its current profits (and other fundamentals). A growth stock is a stock that has a high price relative to its current profits (and other fundamentals).

Growth Stocks versus Value Stocks Compared to Growth Stocks, Value Stocks are... Value Stocks have... Riskier Higher Returns Equally Risky About the Same Returns Less Risky Lower Returns No Opinion No Opinion No Response No Response 0.1.2.3.4 0.05.1.15.2.25 Risk Return

Momentum Compared to Low Momentum Stocks, High Momentum Stocks are... High Momentum Stocks have... Riskier Higher Returns Equally Risky About the Same Returns Less Risky Lower Returns No Opinion No Opinion No Response No Response 0.1.2.3 0.1.2.3 Risk Return

Questions

Rare Disaster Risk How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that in an economic disaster where the amount that the U.S. economy produces in a year shrinks by more than 10% like the Great Depression a dollar I invested in stocks would lose more value than a dollar I put in a bank savings account.

Consumption Commitments How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) My fixed expenses (like mortgage payments, rent, car payments, utility bills, etc.) that are difficult to adjust in the short run.

Return Covariance with Marginal Utility of Money How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that when I especially need the money, the stock market will tend to drop.

Risk of Aggregate Consumption over Next Year How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that when bad news arrives about how the U.S. s material standard of living will change over the next year, the stock market will tend to drop.

Risk of Long-Run Aggregate Consumption How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Risk of Long-Run Aggregate Consumption Concern that when bad news arrives about how the U.S. s material standard of living will change over the 5 year period starting 1 year in the future, the stock market will tend to drop.

Return Covariance with Consumption Growth How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that when I have to cut my spending, the stock market will tend to drop.

Risk of Aggregate Consumption Volatility over Next Year How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that when uncertainty increases about how the U.S. s material standard of living will change over the next year, the stock market will tend to drop.

Consumption Composition Risk How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that when the quality of my physical living situation (how nice my housing is, the safety of my neighborhood, etc.) is dropping faster than the rest of my material quality of life, the stock market will tend to drop.

Risk of Long-Run Aggregate Consumption Volatility How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that when uncertainty increases about how the U.S. s material standard of living will change over the 10 year period starting 1 year in the future, the stock market will tend to drop.

Wealth Too Small How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The amount of money I have available to invest in stocks is too small.

Years until Retirement How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Years left until retirement The number of years I (and my spouse/partner, if applicable) have left until retirement.

Risk of Illness/Injury How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The risk of expenses due to illness or injury to me or someone else in my family.

Labor Income Risk How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that I (or my spouse/partner, if applicable) might become unemployed, receive a pay cut, or not receive an expected pay increase.

Human Capital How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The difference between how much money I have available to invest right now and all the money I (and my spouse/partner, if applicable) expect to earn in wages over the rest of my life.

Time until Significant Non-Retirement Expense How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) How soon I will have significant expenses (like a car purchase, a down payment on a home, school tuition, etc.).

Home Value Risk How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that my home value might fall.

Stocks are an Inflation Hedge How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) A belief that stocks are attractive because when my living expenses increase unexpectedly, the stock market will tend to rise.

Non-Financial Assets Cushion Losses How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) A belief that I can afford to take more risks in my financial portfolio because my non-financial assets (such as my home or small business) will cushion me against losses in my financial portfolio.

Non-Financial Risk How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern my non-financial assets other than my home such as my small business might lose value.

Loss Aversion How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The possibility of even small losses on my stock investments makes me worry.

Internal Habit How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The difference between my current material standard of living and the level I am used to.

Ambiguity / Parameter Uncertainty How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) I don t have a good sense of the average returns and risks of investing in stocks.

External Habit How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The difference between my current material standard of living and the level everybody else around me has experienced recently.

Expected Returns Lower than Usual How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) A belief that the returns I can expect to earn from investing in stocks right now are lower than usual.

Expected Returns Higher than Usual How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) A belief that the returns I can expect to earn from investing in stocks right now are higher than usual.

Stock Market Returns have Momentum How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) A belief that low stock market returns tend to be followed by more low stock market returns.

Stock Market Returns Mean-Revert How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) A belief that low stock market returns tend to be followed by high stock market returns.

Finance Phobia How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) I don t like to think about my finances.

Low Trust in Market Participants How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that companies, managers, brokers, or other market participants might cheat me out of my investments.

Lack of Knowledge About How to Invest How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) My lack of knowledge about how to invest.

Lack of Trustworthy Advisor How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Difficulty in finding a trustworthy advisor.

Experience of Living Through Returns How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The feelings, attitudes, and beliefs about the stock market I ve gotten from living through stock market ups and downs (whether or not I was invested in stocks at the time).

Advice from a Professional Financial Advisor How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Advice from a professional financial advisor I hired.

Personal Experience Investing in Stock Market How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The feelings, attitudes, and beliefs about the stock market I ve gotten from my personal experiences of investing in the stock market.

Religion How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) My religious beliefs, values, and experiences.

Advice from Peers or Family How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Advice from a friend, family member, or coworker.

Advice from Media How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Advice from a book or an article I read, or from somebody on TV, radio, or the internet.

Never Got Around to It How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) I intended to invest in stocks but never got around to it.

Cash for Routine Expenses How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The amount of cash I need to have on hand to pay routine expenses.

Time to Cash How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) Concern that stock investments will take too long to convert into spendable cash in an emergency.

401(k) Defaults How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) The default investment allocation in my (and/or my spouse/partner s, if applicable) work-based retirement savings plan (for example, 401(k), 403(b), Thrift Savings Plan).

Returns Before Birth How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) What I know about the stock market s returns during the decades before I was born.

Rule of Thumb How important are the following factors in determining the percentage of your investable financial assets that is currently invested in stocks? (causing you to not currently own any stocks?) A rule of thumb (for example, The percent you invest in stocks should be 100 minus your age or Invest one-third in stocks, one-third in bonds, and one-third in real estate ).

Costs of Staying up to Date How important are the following factors in causing the amount of money you have to be too small to make it worthwhile to invest in stocks? The ongoing time, money, and/or effort it would take to stay up-to-date on the stock market.

Costs of Learning About Stocks How important are the following factors in causing the amount of money you have to be too small to make it worthwhile to invest in stocks? The amount of time, money, and/or effort it would take to learn about stocks.

Costs of Hiring an Advisor How important are the following factors in causing the amount of money you have to be too small to make it worthwhile to invest in stocks? The amount of time, money, and/or effort it would take to hire an investment advisor.

Costs of Maintaining Advisor How important are the following factors in causing the amount of money you have to be too small to make it worthwhile to invest in stocks? The ongoing time, money, and/or effort it would take to maintain a relationship with an investment advisor after hiring him or her.

Costs of Maintaining an Account How important are the following factors in causing the amount of money you have to be too small to make it worthwhile to invest in stocks? The ongoing time, money, and/or effort it would take to maintain an investment account after setting it up.

Costs of Setting up an Account How important are the following factors in causing the amount of money you have to be too small to make it worthwhile to invest in stocks? The amount of time, money, and/or effort it would take to set up an investment account.

Tax Complexity How important are the following factors in causing the amount of money you have to be too small to make it worthwhile to invest in stocks? Stock investments would make my tax returns harder to prepare.

Home You said you own your home. How important is that in causing you to not have enough money to make it worthwhile to invest in stocks?

Less Money Available Now How important are the following factors in causing you to not get around to investing in stocks? I have less money available now than when I originally planned on investing in stocks.

Too Costly How important are the following factors in causing you to not get around to investing in stocks? I discovered that it takes more time, money, and/or effort to invest in stocks than I expected.

Too Busy How important are the following factors in causing you to not get around to investing in stocks? I was too busy.

Procrastinated How important are the following factors in causing you to not get around to investing in stocks? I procrastinated for no good reason.

Not Important Enough How important are the following factors in causing you to not get around to investing in stocks? I decided it wasn t important enough to think about it.

Higher Returns How important were the following factors in your decision(s) to invest in an actively managed stock mutual fund instead of a passively managed stock mutual fund? A belief that the actively managed stock mutual fund would give me higher returns on average than a passively managed stock mutual fund.

Advisor Recommendation How important were the following factors in your decision(s) to invest in an actively managed stock mutual fund instead of a passively managed stock mutual fund? The recommendation of an investment advisor I hired.

Hedging How important were the following factors in your decision(s) to invest in an actively managed stock mutual fund instead of a passively managed stock mutual fund? A belief that even though the actively managed stock mutual fund would have lower returns on average than a passively managed stock mutual fund, the actively managed fund would have higher returns than the passively managed fund when the economy does poorly (for example, during recessions or stock market crashes).

Passive Not Available How important were the following factors in your decision(s) to invest in an actively managed stock mutual fund instead of a passively managed stock mutual fund? A suitable passively managed stock mutual fund wasn t available in my employer-sponsored retirement savings plan.

Managerial Skill How much do you agree with the following statements? When an actively managed stock mutual fund has had significantly higher past returns than the overall stock market, this is strong evidence that its manager has good stock-picking skills.

Decreasing Returns to Scale How much do you agree with the following statements? When an actively managed stock mutual fund gets more money to manage, it becomes harder for it to generate higher returns than the overall stock market.

Growth v Value Risk Compared to a growth stock, I expect a value stock to normally be... Riskier over the next year, on average Equally risky over the next year, on average Less risky over the next year, on average No opinion

Growth v Value Return Compared to a growth stock, I expect a value stock to normally have... Higher returns over the next year, on average About the same returns over the next year, on average Lower returns over the next year, on average No opinion

Momentum Risk Compared to a stock whose price fell a lot over the past year, I expect a stock whose price rose a lot over the past year to normally be... Riskier over the next year, on average Equally risky over the next year, on average Less risky over the next year, on average No opinion

Momentum Return Compared to a stock whose price fell a lot over the past year, I expect a stock whose price rose a lot over the past year to normally have... Higher returns over the next year, on average About the same returns over the next year, on average Lower returns over the next year, on average No opinion

Survey Panel RAND American Life Panel. Survey completed between Dec. 14 and Dec. 27, 2016. RAND circulated an invitation to 2,148 members 1,255 read informed consent disclosure 1,202 gave consent 1,107 eligible (based on screening questions) 1,098 agreed to answer additional questions

Surveys Design Process Pilot tested questions on MTurk: Included I don t understand as answer option for every question Free-response question at end of equity allocation section for additional factors we had not mentioned Solicited feedback from researchers On third round of MTurk pilots: < 1% do not understand responses for 61 of 68 questions Remaining 7 questions: < 3% do not understand responses

Surveys in Finance Most influential work on corporate dividend policy: Lintner (1956) survey More recent survey work in corporate finance seeking to test wide range of theories Graham and Harvey (2001), Brav et al. (2005), Graham, Harvey, and Rajgopal (2005), Gompers, Kaplan, and Mukharlyamov (2016), and Gompers et al. (2016) More recent survey work of investment professionals to test academic theories Cheung and Wong (2000), Cheung and Chinn (2001), and Cheung, Chinn, and Marsh (2004)

Limitations of Surveys Measurement Error Perceptions v Reality Our survey measures how people perceive themselves to be making decisions This may not be fully informative for how they actually make decisions More More

Measurement Error in Surveys Measurement error can arise from: Fat fingers Poor incentives / Low motivation Meaning of response category differs across respondents BUT if the errors white noise, the ordinal within-respondent ranking is still informative

Perceptions v Reality Individuals might not know why they really do things Milton Friedman s as if argument We only care about what individuals do, not what they say or think We think perceptions are still important. Why?

Why We Should Care About Perceptions 1 Perceptions are unlikely to be entirely unrelated to true decision process, which are useful for predicting behavior Harris and Keane (1999): Relative to model using only health insurance plan attributes, adding survey responses about importance of attributes doubles predictive power 2 Perceived decision-making process affects individual s forecast of future actions, which is an input to today s actions 3 Perceptions can affect demand for debiasing mechanisms 4 It is inherently interesting to know what individuals believe about themselves

Opening Questions What is the value of all your investable financial assets? Include the value of your bank accounts, brokerage accounts, retirement savings accounts, investment properties, etc., but NOT the value of the home(s) you live in or any private businesses you own. What percentage of your investable financial assets is currently invested in stocks, either directly or through mutual funds? if > 0 participant if = 0 non-participant

Sample Weights Weight responses to match U.S. adult population on: Gender Age Race/ethnicity Education # household members Household income

Description Complexity & Factor Importance Is description complexity related to reported factor importance? where importance q = α + β complexity q + ε q importance q fraction responding very or extremely important for factor q complexity q complexity of question q, as measured by the number of words used to describe the factor the factor description s Fleisch-Kincaid grade level score Results

Description Complexity & Factor Importance importance q = α + β complexity q + ε q (1) (2) Importance Importance Word Count 0.13 (0.87) Fleisch-Kincaid Score 0.0035 (0.10) Dependant variable is proportion of respondents describing the factor as very or extremely important. t-statistics in parenthesis. One

Principal Component Analysis A principal component analysis reveals 6 clusters of factors: Neoclassical asset pricing factors Consumption needs and human capital Return predictability and defaults Discomfort with market Advice Personal experience

Principal Component 1: Neoclassical asset pricing factors Risk of Aggregate Consumption over Next Year (0.41) Risk of Aggregate Consumption Volatility over Next Year (0.39) Risk of Long-Run Aggregate Consumption (0.39) Risk of Long-Run Aggregate Consumption Volatility (0.38) Return Covariance with Marginal Utility of Consumption (0.35) Return Covariance with Marginal Utility of Money (0.33) Consumption Composition Risk (0.26)

Principal Component 2: Consumption needs and human capital Consumption Commitments (0.45) Time until Significant Non-Retirement Expense (0.43) Internal Habit (0.36) Human Capital (0.34) Risk of Illness/Injury (0.32) External habit (0.30) Cash for Routine Expenses (0.27)

Principal Component 3: Return predictability and defaults Stock Market Returns Mean-Revert (0.49) Expected Stock Returns Lower than Usual (0.40) Stock Market Returns have Momentum (0.38) 401(k) Default (0.34) Rule of Thumb (0.26) Religion (0.25) Time to Cash (0.24)

Principal Component 4: Discomfort with market Lack of Knowledge About How to Invest (0.50) Ambiguity / Parameter Uncertainty (0.49) Lack of Trustworthy Advisor (0.42) Loss Aversion (0.38) Low Trust in Market Participants (0.29)

Principal Component 5: Advice Advice from Media (0.52) Advice from Peers or Family (0.51) External habit (0.31) Rule of Thumb (0.28) Returns Before Birth (0.26) Advice from a Professional Financial Advisor (0.20)

Principal Component 6: Personal experience Experience of Living Through Returns (0.65) Personal Experience Investing in Stock Market (0.64) Returns Before Birth (0.20)

Mutual Funds Overview 52% report knowing what a mutual fund is. 33% have purchased shares in an actively managed mutual fund. More

Mutual Funds Details A mutual fund is a company that brings together money from many people and invests it in stocks, bonds or other assets. In an actively managed stock mutual fund, the fund manager tries to beak the overall stock market s return by picking stocks to buy. In contrast, a passively managed stock mutual fund (also known as an index fund) holds stocks in order to match the performance of a market benchmark (such as the S&P 500 stock market index) as closely as possible. One

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