Prior investment outcomes and stock investment in defined contribution plans

ABSTRACT

In this study, we employ the 2001–2013 Survey of Consumer Finances to examine how prior investment outcomes affect portfolio allocation in defined contribution (DC) plans. Results show that investors with prior gains are more likely to invest all DC plan assets in stocks. Factors such as risk tolerance and investment horizon positively affect investors’ tendency to allocate all DC assets to stocks. These findings have important implications for investors, researchers and financial professionals.

KEYWORDS:

• Behaviour
• defined contribution plans
• house money effect
• prior outcome

JEL CLASSIFICATION:

• D12
• D14
• G11

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the USDA National Institute of Food and Agriculture [Hatch project #1002789].