research@hec - Issue #12 - (Page VII)

Investments Key Ideas They tend to remain stable despite market fluctuations. that households manage their investments. Measuring the Performance of Households’ • On the whole, households have rational investment strategies. •An index combining three types of error can be used to rank the financial adeptness of households according to characteristics such as income or education level. • Experience with finance itself has only a limited positive impact on the way M In a series of three articles, Laurent Calvet, John Campbell and Paolo Sodini investigate the financial “sophistication” of households. They evaluate, first of all, the nature of households' financial investment portfolios. Analyzing a Swedish database (provided by the Swedish national statistics agency, and whose utility resides in the fact that it compiles data from all Swedish households), they find that households generally hold few stocks directly, relying instead mainly on investment funds. The authors then measured the performance of households’ portfolios of liquid financial assets, which include cash (in the form of bank deposits), investment funds (similar to SICAVs or mutual funds), and directly held stocks. The authors evaluate three types of errors at the level of individual households: underdiversification of the portfolio of “cash,” stocks and investment funds, inertia in risk management, and a tendency to sell winning stocks and sell losing ones (the “disposition effect”). THE FINANCIAL PERFORMANCE OF HOUSEHOLDS Calvet and his co-authors observe that three factors positively influence households’ financial performance: level of education, income, and having multiple children. This better level of performance manifests itself in a more diverse investment portfolio. The researchers also studied the dynamic of household portfolios: that is, the behavior of households in the face of market fluctuations. Do they continue to pursue their initial strategy, or do they follow the market and alter their behavior? They show that households have a tendency to counterbalance the effects of the market and thus stabilize the degree of risk in their portfolio. The researchers also observed households’ tendency to sell stocks whose value is rising and to hold on to those whose value is dwindling with the fluctuation of markets. The authors establish a link between this “disposition effect” and management of portfolio risk. Laurent E. Calvet BIOGRAPHY Laurent E. Calvet is a graduate of the Ecole Polytechnique and Chief Engineer of the Corps des Ponts et Chaussées. He holds a PhD in economics from Yale University. He joined the faculty at HEC after being John Loeb Associate Professor in the economics department of Harvard University. His research interests include household finances, asset evaluation, and modeling volatility. A book on his work entitled Multifractal Volatility: Theory, Forecasting and Pricing (co-authored with Adlai J. Fisher) was published recently. In 2006 he received the Le Monde Europlace Prize for the best young researcher in finance. December 2009-January 2010 • research@hec VII

Table of Contents for the Digital Edition of research@hec - Issue #12

Cover & Contents
HEC Center for Research on Individuals and Organizations
Government vs. Technology: Trustworthiness and E-Government
Learning from Imitators to Increase Your Technological Advantage
Measuring the Performance of Households’ Investments

research@hec - Issue #12

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