Working Paper: NBER ID: w13656
Authors: James J. Choi; David Laibson; Brigitte C. Madrian
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 simultaneously selected both accounts' allocations, leading them to mentally integrate the two. Own-contribution allocations before the rule change equal the combined own- and match-contribution allocations afterwards, whereas combined allocations differ sharply across regimes.
Keywords: Mental Accounting; 401k Plans; Asset Allocation; Behavioral Economics
JEL Codes: D01; D14; G11; G23; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 401k matching policy change (G35) | allocation of contributions to employer stock (J54) |
| lack of awareness of the match (Y70) | higher overall allocations to employer stock (G23) |
| post-change requirement to select allocations (G11) | integration of match allocation into decision-making (C78) |
| investor passivity and short-sale constraints (G19) | flypaper effect (H30) |