Investor Sophistication and the Participation, Home Bias ...

Investor Sophistication and the Participation, Home Bias, Diversification, and Employer Stock Puzzles

Miles S. Kimball

Tyler Shumway

November 7, 2006

Puzzles

? There are a number of puzzling behaviors ? Participation puzzle ? Home bias ? Employer stock puzzle ? Diversification

? There is a small literature for each puzzle ? Puzzles seem to require rationalizations ? We test whether these puzzles are related and

whether they are related to investor sophistication

Why Should We Care?

? Explanations consider each puzzle separately

? If the puzzles are correlated, harder to explain

? If the puzzles are related to sophistication ? almost certainly are mistakes ? might be possible to correct them

Survey of Consumer Attitudes

? We use data from Survey of Consumer Attitudes ? Survey is monthly - Consumer Sentiment Index ? We were able to suggest several questions ? Survey data let us look at things simultaneously ? We have three types of variables:

? dependent variables ? "quiz-like" sophistication variables ? controls and instruments ? All variables coded so "correct" value higher

Dependent Variables

? Participation variables ? Partic, StkFrac, Frac>0

? Employer stock variables ? EmplStk, ESAtt

? Home bias variables ? HomeBs, HBAtt

? Diversification variables ? StkDivr, NumAsst

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