The investor’s or household’s risk tolerance parameter is a key input in the lifecycle models stemming from Samuelson (1969) and Merton (1969, 1971) as well as the single period mean-variance models stemming from Markowitz (1952, 1959). Using the …
Goals-based investing frequently treats each goal independently and constructs each corresponding portfolio in isolation. Beyond the possible efficiency losses caused by the self-imposed constraints of a mental accountingoriented bucketing approach, …
Lifecycle models are increasingly popular in financial planning. However, they often overlook the significant risk posed by income shocks—such as career disruptions, economic downturns, or technological advancements—that can affect financial plans, …
In the long run, we are all dead. Nonetheless, when studying the short-run dynamics of economic models, it is crucial to consider boundary conditions that govern long-run, forwardlooking behavior, such as transversality conditions. We demonstrate …
I develop a life-cycle model of household portfolio decisions that accounts for heterogeneity in financial literacy and employ it to examine portfolio adjustments following household-level shocks. I use variation in unplanned births to parameterize the model and identify the margins of portfolio adjustments following household-level fertility shocks. Empirical evidence suggests that households increase the liquidity of their portfolios following such shocks. Using the model, I compare how households with different financial-literacy levels respond to similar shocks, and I show that higher financial literacy is associated with smoother portfolio adjustments following shock onset. All else equal, the more financially literate households appear less susceptible to the detrimental effects of liquidity constraints and the impact of portfolio-adjustment costs. The interaction between liquidity constraints and financial literacy plays a key role in the model, as it explains the differential speed and direction of portfolio adjustments observed in the data. Counterfactual exercises show that financial literacy mitigates the negative welfare effects of unexpected fertility shocks by at least 20\%.
We study the accumulation of financial competencies in a model of dynamic skill formation. We find evidence of complementarities between financial literacy and risk attitudes. Risk tolerance facilitates experimentation and learning-by-doing. Latent risk attitudes and financial literacy are unevenly distributed across households and do not align with general human capital. Linking estimates with data on household portfolios, we show that early-life differences in financial literacy may account for more than half of the standard deviation of wealth by age 60. Dynamic complementarities in skill for- mation imply that early interventions could reduce later-life inequality while boosting wealth growth.