What Drives Variation in Investor Portfolios? Evidence from Retirement Plans - Joint with IO

Mark Egan (Harvard Business School)

December 10, 2021, 14:00–15:30


Room Online

Finance Seminar


We study empirical patterns in investment behavior using a comprehensive data set of defined contribution plans. Using plan-level portfolio allocation data for 70,000 401(k) plans over the period 2009-2019, we document substantial differences in investment behavior across plans. Plans with wealthier and more educated participants tend to have higher equity exposure while plans with a greater share of retirees and minorities tend to have lower equity exposure. These patterns cannot be explained by differences in 401(k) menus or fixed investment costs. To help interpret these facts, we use a revealed preference approach to estimate investors' expectations of stock market returns and risk aversion, where we allow investors to have heterogeneous risk aversion and subjective and potentially biased beliefs. We find that there is substantial variation in both beliefs and risk aversion across investors and over time, and that both sources of variation help explain investors' portfolio decisions. We also provide new evidence to understand how investors form beliefs. We find that investors extrapolate beliefs from past fund returns even when they initially allocate portfolios in new plans. We also find that investors extrapolate beliefs from the past performance of their employer, which suggests that investor experience helps shape beliefs.


Stock Market Expectations, Demand Estimation, Retirement Planning, Defined; Contribution Plans;

JEL codes

  • G11: Portfolio Choice • Investment Decisions
  • G12: Asset Pricing • Trading Volume • Bond Interest Rates
  • G40:
  • G51:
  • J32: Nonwage Labor Costs and Benefits • Retirement Plans • Private Pensions