Articlegreen2003

Wealth, Information Acquisition, and Portfolio Choice

311 citations0/0 files storedReview of Financial Studies

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Financial Markets and Investment Strategies Financial Literacy, Pension, Retirement Analysis Economic theories and models

Abstract

I solve (with an approximation) a Grossman-Stiglitz economy under general preferences, thus allowing for wealth effects. Because information generates increasing returns, decreasing absolute risk aversion, in conjunction with the availability of costly information, is sufficient to explain why wealthier households invest a larger fraction of their wealth in risky assets. One no longer needs to resort to decreasing relative risk aversion, an empirically questionable assumption. Furthermore, I show how to distinguish empirically between these two explanations. Finally, I find that the availability of costly information exacerbates wealth inequalities.

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References

1982Time to Build and Aggregate Fluctuations 2001Boys will be Boys: Gender, Overconfidence, and Common Stock Investment 1980On the Impossibility of Informationally Efficient Markets 1972Essays in the Theory of Risk-Bearing.2000Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors 2000The information content of stock markets: why do emerging markets have synchronous stock price movements?1999Home Bias at Home: Local Equity Preference in Domestic Portfolios 1991Investor Diversification and International Equity Markets

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2007Are Economists More Likely to Hold Stocks?2011Social Networks, Information Acquisition, and Asset Prices 2011Financial Literacy and the Demand for Financial Advice 2008Information Acquisition and Under-Diversification 2010How Much Does Wealth Matter in the Acquisition of Financial Literacy?2018Does It Pay to Pay Attention?

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