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American Economic Review: Vol. 99 No. 5 (December 2009)

AER Volume. 99, Issue 5 | Previous ArticleNext Article

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Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect

Article Citation

Choi, James J., David Laibson, and Brigitte C. Madrian. 2009. "Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect." American Economic Review, 99(5): 2085-95.

DOI: 10.1257/aer.99.5.2085

Abstract

Consistent with mental accounting, we document that investors sometimes choose the asset allocation for one account without considering the asset allocation of their other accounts. The setting is a firm that changed its 401(k) matching rules. Initially, 401(k) enrollees chose the allocation of their own contributions, but the firm chose the match allocation. These enrollees ignored the match allocation when choosing their own-contribution allocation. In the second regime, enrollees selected both accounts' allocations, leading them to integrate the two. Own-contribution allocations before the rule change equal the combined own- and match-contribution allocations afterward, whereas combined allocations differ sharply across regimes. (JEL G11, J32)

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Authors

Choi, James J. (Yale U)
Laibson, David (Harvard U)
Madrian, Brigitte C. (Harvard U)

JEL Classifications

G11: Portfolio Choice; Investment Decisions
J32: Nonwage Labor Costs and Benefits; Private Pensions