Essays in household finance

This dissertation presents three empirical analyses on individual investment decisions with risky financial markets. Each chapter investigates a distinct aspect of individual financial behaviour with risky financial markets, but provide evidence on one important aspect of household finance: Individual behaviour is systematically different from normative views of what they ought to do. The first paper, Endowment effects in the field: Evidence from Indiaâs IPO lotteries presents large-scale field evidence to a suite of laboratory studies call into question the fundamental neoclassical assumption that preferences and beliefs are independent of fownership. It documents that winners of randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold these shares than lottery losers, 1, 6 and even 24 months after the random allocation. This finding persists in samples of highly active investors, suggesting along with additional evidence that this "endowment effect" is not driven by inertia alone. This evidence is consistent with the laboratory literature that documents endowment effects for risky gambles. The second paper, The effect of experience on investor behaviour: Evidence from Indiaâs IPO lotteries exploits the randomized allocation of stocks in Indian IPO lotteries to provide new estimates of the causal effect of investment experiences on future investment behaviour. It shows that investors experiencing exogenous gains in IPO stocks (the treatment) are more likely to apply for future IPOs, increase trading in their portfolios, exhibit a stronger disposition effect, and tilt their portfolios towards the sector of the treatment IPO. These effects vary with the size, variability and salience of the gain, and are stronger for smaller and younger investors. However, these effects persist for larger and older investors, suggesting that experiencing gains exerts a powerful force even on sophisticated players in financial markets. The third paper, The effect of subjective life expectancy on financial decisions investigates one potential mechanism by which experiences affect individual financial decisions. It investigates whether exposure to natural disasters and mass shootings influences subjective life expectancy and affect financial decisions. Using data from the United States, the paper shows that being exposed to natural disasters and mass shootings significantly decreases an individualâs subjective life expectancy. Further, it shows that such experiences monotonically reduce the share of financial assets in equities and non-government bonds for increasing levels of lifespan optimism. These findings provide evidence for the existence of an expectations channel for personal experiences to affect financial decisions. Taken together, these three studies contribute to the growing body of work on household finance and open the door to further theoretical and empirical research in the field.