Abstract
We investigate whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. Focusing on the income risk-sharing role of financial markets, we find that risk sharing is higher (more than double) in U.S. states where investors are more sophisticated and exhibit weaker behavioral biases. The potential for risk sharing varies geographically, but states with better risk-sharing opportunities are able to achieve higher levels of risk sharing only when investors in those states are more sophisticated. Collectively, these results indicate that investors' aggregate behavioral biases and their lack of financial sophistication adversely affect the local macro-economy.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1513-1559 |
| Number of pages | 47 |
| Journal | Review of Financial Studies |
| Volume | 24 |
| Issue number | 5 |
| DOIs | |
| State | Published - May 2011 |
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ASJC Scopus subject areas
- Finance
- Accounting
- Economics and Econometrics
Cite this
Do behavioral biases adversely affect the macro-economy? / Korniotis, George; Kumar, Alok.
In: Review of Financial Studies, Vol. 24, No. 5, 05.2011, p. 1513-1559.Research output: Contribution to journal › Article
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TY - JOUR
T1 - Do behavioral biases adversely affect the macro-economy?
AU - Korniotis, George
AU - Kumar, Alok
PY - 2011/5
Y1 - 2011/5
N2 - We investigate whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. Focusing on the income risk-sharing role of financial markets, we find that risk sharing is higher (more than double) in U.S. states where investors are more sophisticated and exhibit weaker behavioral biases. The potential for risk sharing varies geographically, but states with better risk-sharing opportunities are able to achieve higher levels of risk sharing only when investors in those states are more sophisticated. Collectively, these results indicate that investors' aggregate behavioral biases and their lack of financial sophistication adversely affect the local macro-economy.
AB - We investigate whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. Focusing on the income risk-sharing role of financial markets, we find that risk sharing is higher (more than double) in U.S. states where investors are more sophisticated and exhibit weaker behavioral biases. The potential for risk sharing varies geographically, but states with better risk-sharing opportunities are able to achieve higher levels of risk sharing only when investors in those states are more sophisticated. Collectively, these results indicate that investors' aggregate behavioral biases and their lack of financial sophistication adversely affect the local macro-economy.
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UR - http://www.scopus.com/inward/citedby.url?scp=79954486817&partnerID=8YFLogxK
U2 - 10.1093/rfs/hhq110
DO - 10.1093/rfs/hhq110
M3 - Article
AN - SCOPUS:79954486817
VL - 24
SP - 1513
EP - 1559
JO - Review of Financial Studies
JF - Review of Financial Studies
SN - 0893-9454
IS - 5
ER -