TY  - JOUR
AU  - Calvet,Laurent E.
AU  - Campbell,John Y.
AU  - Sodini,Paolo
TI  - Down or Out: Assessing the Welfare Costs of Household Investment Mistakes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12030
PY  - 2006
Y2  - February 2006
UR  - http://www.nber.org/papers/w12030
L1  - http://www.nber.org/papers/w12030.pdf
N1  - Author contact info:
Laurent E. Calvet
Department of Finance
HEC Paris
1 avenue de la Libération
78351 Jouy en Josas
France
Tel: +33 13 967 9409
Fax: +33 13 967 7085
E-Mail: calvet@hec.fr

John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Paolo Sodini
Department of Finance
Stockholm School of Economics
Sveavägen 65
Box 6501
SE-113 83 Stockholm
Sweden
E-Mail: Paolo.Sodini@hhs.se
AB  - This paper investigates the efficiency of household investment decisions in a unique dataset containing the disaggregated wealth and income of the entire population of Sweden. The analysis focuses on two main sources of inefficiency in the financial portfolio: underdiversification of risky assets ("down") and nonparticipation in risky asset markets ("out"). We find that while a few households are very poorly diversified, the cost of diversification mistakes is quite modest for most of the population. For instance, a majority of participating Swedish households are sufficiently diversified internationally to outperform the Sharpe ratio of their domestic stock market. We document that households with greater financial sophistication tend to invest more efficiently but also more aggressively, so the welfare cost of portfolio inefficiency tends to be greater for these households. The welfare cost of nonparticipation is smaller by almost one half when we take account of the fact that nonparticipants would be unlikely to invest efficiently if they participated in risky asset markets.
ER  -