IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v36y2012i7p2145-2156.html
   My bibliography  Save this article

Investor sophistication and risk taking

Author

Listed:
  • de Dreu, Jan
  • Bikker, Jacob A.

Abstract

Using investment policy data of 857 Dutch pension funds during 1999–2006, we develop three indicators of investor sophistication. The indicators show that pension funds’ strategic portfolio choices are often based on coarse and less sophisticated approaches. First, most pension funds round strategic asset allocations to the nearest multiple of 5%, similar to age heaping in demographic and historical studies. Second, many pension funds invest little or nothing in alternative, more complex asset classes, resulting in limited asset diversification. Third, many pension funds favor regional investments and as such do not fully employ the opportunities of international risk diversification. Our indicators are correlated with pension fund size, in line with the expectation that smaller pension funds are generally less sophisticated than large pension funds. Using the indicators for investor sophistication, we show that less sophisticated pension funds tend to opt for investment strategies with less risk.

Suggested Citation

  • de Dreu, Jan & Bikker, Jacob A., 2012. "Investor sophistication and risk taking," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2145-2156.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:2145-2156
    DOI: 10.1016/j.jbankfin.2012.03.023
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426612000854
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jbankfin.2012.03.023?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 707-747, October.
    2. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 301-348.
    3. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
    4. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Measuring the Financial Sophistication of Households," American Economic Review, American Economic Association, vol. 99(2), pages 393-398, May.
    5. Jacob A. Bikker & Dirk W.G.A. Broeders & Dirk Jan de Dreu, 2010. "Stock Market Performance and Pension Fund Investment Policy: Rebalancing, Free Float, or Market Timing?," International Journal of Central Banking, International Journal of Central Banking, vol. 6(2), pages 53-79, June.
    6. Canner, Niko & Mankiw, N Gregory & Weil, David N, 1997. "An Asset Allocation Puzzle," American Economic Review, American Economic Association, vol. 87(1), pages 181-191, March.
    7. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, August.
    8. William N. Goetzmann & Alok Kumar, 2008. "Equity Portfolio Diversification," Review of Finance, European Finance Association, vol. 12(3), pages 433-463.
    9. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    10. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-226, May.
    11. Dirk Broeders, 2010. "Valuation of Contingent Pension Liabilities and Guarantees Under Sponsor Default Risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 911-934, December.
    12. Cohn, Richard A, et al, 1975. "Individual Investor Risk Aversion and Investment Portfolio Composition," Journal of Finance, American Finance Association, vol. 30(2), pages 605-620, May.
    13. Bikker, Jacob A. & De Dreu, Jan, 2009. "Operating costs of pension funds: the impact of scale, governance, and plan design," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(1), pages 63-89, January.
    14. A'Hearn, Brian & Baten, Jörg & Crayen, Dorothee, 2009. "Quantifying Quantitative Literacy: Age Heaping and the History of Human Capital," The Journal of Economic History, Cambridge University Press, vol. 69(3), pages 783-808, September.
    15. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    16. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
    17. Kang, Jun-Koo & Stulz, Rene M., 1997. "Why is there a home bias? An analysis of foreign portfolio equity ownership in Japan," Journal of Financial Economics, Elsevier, vol. 46(1), pages 3-28, October.
    18. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    19. Gur Huberman & Wei Jiang, 2006. "Offering versus Choice in 401(k) Plans: Equity Exposure and Number of Funds," Journal of Finance, American Finance Association, vol. 61(2), pages 763-801, April.
    20. Robert Myers, 1976. "An instance of reverse heaping of ages," Demography, Springer;Population Association of America (PAA), vol. 13(4), pages 577-580, November.
    21. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    22. Karlsson, Anders & Norden, Lars, 2007. "Home sweet home: Home bias and international diversification among individual investors," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 317-333, February.
    23. Deborah J. Lucas & Stephen P. Zeldes, 2009. "How Should Public Pension Plans Invest?," American Economic Review, American Economic Association, vol. 99(2), pages 527-532, May.
    24. Ravi Dhar & Ning Zhu, 2006. "Up Close and Personal: Investor Sophistication and the Disposition Effect," Management Science, INFORMS, vol. 52(5), pages 726-740, May.
    25. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
    26. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. "Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-1698, December.
    27. Alestalo, Noora & Puttonen, Vesa, 2006. "Asset allocation in Finnish pension funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(1), pages 27-44, March.
    28. Gerber, David S. & Weber, René, 2007. "Demography and investment behavior of pension funds: evidence for Switzerland," Journal of Pension Economics and Finance, Cambridge University Press, vol. 6(3), pages 313-337, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Demetrios Vakratsas & Aneel Keswani & David Stolin, 2021. "Advertising persuasion in dual markets," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(1), pages 239-245, January.
    2. Martijn A. Boermans & Robert Vermeulen, 2020. "International investment positions revisited: Investor heterogeneity and individual security characteristics," Review of International Economics, Wiley Blackwell, vol. 28(2), pages 466-496, May.
    3. Jacob A. Bikker, 2017. "Performance of the life insurance industry under pressure: efficiency, competition and consolidation," Chapters, in: Jacob A. Bikker & Laura Spierdijk (ed.), Handbook of Competition in Banking and Finance, chapter 9, pages 152-182, Edward Elgar Publishing.
    4. Clark, Gordon L. & Fiaschetti, Maurizio & Tufano, Peter & Viehs, Michael, 2018. "Playing with your future: Who gambles in defined-contribution pension plans?," International Review of Financial Analysis, Elsevier, vol. 60(C), pages 213-225.
    5. Chiu, Junmao & Chen, Chin-Ho, 2023. "Limit order revisions across investor sophistication," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 74-90.
    6. Antoniou, Constantinos & Harrison, Glenn W. & Lau, Morten I. & Read, Daniel, 2017. "Information Characteristics and Errors in Expectations: Experimental Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(2), pages 737-750, April.
    7. Stephan D. Whitaker, 2014. "Financial Innovations and Issuer Sophistication in Municipal Securities Markets," Working Papers (Old Series) 1404, Federal Reserve Bank of Cleveland.
    8. Boermans, Martijn A. & Galema, Rients, 2019. "Are pension funds actively decarbonizing their portfolios?," Ecological Economics, Elsevier, vol. 161(C), pages 50-60.
    9. Narayan, Seema & Rehman, Mobeen Ur, 2021. "Can home-biased investors diversify interregionally in the long run?," Economic Modelling, Elsevier, vol. 97(C), pages 167-181.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. J. de Dreu & J.A. Bikker, 2009. "Pension fund sophistication and investment policy," Working Papers 09-13, Utrecht School of Economics.
    2. J. de Dreu & J.A. Bikker, 2009. "Pension fund sophistication and investment policy," Working Papers 09-13, Utrecht School of Economics.
    3. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    4. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    5. Carpio, Ronaldo & Guo, Meixin & Liu, Yuan & Pyun, Ju Hyun, 2021. "Wealth heterogeneity, information acquisition and equity home bias: Evidence from U.S. household surveys of consumer finance," Journal of Banking & Finance, Elsevier, vol. 126(C).
    6. Scholnick, Barry & Massoud, Nadia & Saunders, Anthony, 2013. "The impact of wealth on financial mistakes: Evidence from credit card non-payment," Journal of Financial Stability, Elsevier, vol. 9(1), pages 26-37.
    7. Raslan Alzuabi & Sarah Brown & Mark N. Harris & Karl Taylor, 2024. "Modelling the composition of household portfolios: A latent class approach," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(1), pages 243-275, February.
    8. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.
    9. Barber, Brad M. & Odean, Terrance, 2013. "The Behavior of Individual Investors," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1533-1570, Elsevier.
    10. Jacobs, Heiko & Müller, Sebastian & Weber, Martin, 2014. "How should individual investors diversify? An empirical evaluation of alternative asset allocation policies," Journal of Financial Markets, Elsevier, vol. 19(C), pages 62-85.
    11. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Measuring the Financial Sophistication of Households," American Economic Review, American Economic Association, vol. 99(2), pages 393-398, May.
    12. Milo Bianchi, 2018. "Financial Literacy and Portfolio Dynamics," Journal of Finance, American Finance Association, vol. 73(2), pages 831-859, April.
    13. Zhi Da & Borja Larrain & Clemens Sialm & José Tessada, 2016. "Coordinated Noise Trading: Evidence from Pension Fund Reallocations," NBER Working Papers 22161, National Bureau of Economic Research, Inc.
    14. Meyer, Steffen & Urban, Linda & Ahlswede, Sophie, 2015. "Does a personalized feedback on investment success mitigate investment mistakes of private investors? Answers from large natural field experiment," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112988, Verein für Socialpolitik / German Economic Association.
    15. Lu, Xiaomeng & Zhang, Yong & Zhang, Yixing & Wang, Lin, 2020. "Can investment advisors promote rational investment? Evidence from micro-data in China," Economic Modelling, Elsevier, vol. 86(C), pages 251-263.
    16. Maximilian Koestner & Benjamin Loos & Steffen Meyer & Andreas Hackethal, 2017. "Do individual investors learn from their mistakes?," Journal of Business Economics, Springer, vol. 87(5), pages 669-703, July.
    17. Marieke Bos & Chloé Le Coq & Peter van Santen, 2022. "Scarcity and consumers’ credit choices," Theory and Decision, Springer, vol. 92(1), pages 105-139, February.
    18. Lu, Xiaomeng & Guo, Jiaojiao & Gan, Li, 2020. "International comparison of household asset allocation: Micro-evidence from cross-country comparisons," Emerging Markets Review, Elsevier, vol. 43(C).
    19. Ødegaard, Bernt Arne, 2009. "Who moves stock prices? Monthly evidence," UiS Working Papers in Economics and Finance 2009/4, University of Stavanger.
    20. Magnus Dahlquist & Ofer Setty & Roine Vestman, 2018. "On the Asset Allocation of a Default Pension Fund," Journal of Finance, American Finance Association, vol. 73(4), pages 1893-1936, August.

    More about this item

    Keywords

    Pension funds; Investment policy; Portfolio choice; Behavioural finance; Heaping; Diversification; Home bias;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:2145-2156. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.