Abstract
We propose a heuristic portfolio rule, which significantly simplifies individuals' asset allocation decisions over the life cycle. Under this heuristic, equity exposure is a linear function of the individual's labor-to-wealth ratio and age. When individuals follow our heuristic, welfare gains when switching to the optimal policy are only 0.35% of lifetime consumption (around USD 9,800). Relative to portfolio strategies used by individuals in the data, welfare gains from using our heuristic are about 2.2% (around USD 61,600). Our results are robust to different educational attainments and family structures.
| Original language | English |
|---|---|
| Pages (from-to) | 1426-1444 |
| Number of pages | 19 |
| Journal | European journal of finance |
| Volume | 31 |
| Issue number | 11 |
| Early online date | 1 Apr 2025 |
| DOIs | |
| Publication status | Published - 2025 |
JEL classifications
- e21 - "Macroeconomics: Consumption; Saving; Wealth"
- g11 - "Portfolio Choice; Investment Decisions"
Keywords
- Consumption-savings decisions
- heuristic portfolio choice
- life cycle model
- household finance
- LIFE-CYCLE
- FINANCIAL LITERACY
- ASSET ALLOCATION
- CHOICE
- STOCK
- CONSUMPTION
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