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The Flypaper Effect in Individual Investor Asset Allocation

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  • James Choi
  • David Laibson
  • Brigitte Madrian

Abstract

We document a flypaper effect in asset allocation: securities received in kind "stick where they hit." We study a firm that twice changed the rules governing the securities in which its 401(k) matching contributions were initially invested. Both of these rule changes were economically neutral: employees were always free to immediately reallocate their match account balances. However, we find that most employees neither reallocate their match balances, nor offset employer-initiated changes in the match allocation by adjusting the allocation of their own contributions. Consequently, these rule changes caused dramatic shifts in participants' 401(k)portfolio risk. After examining several alternative explanations for this flypaper effect, we conclude that it is largely due to a combination of passivity and mental accounting.

Suggested Citation

  • James Choi & David Laibson & Brigitte Madrian, 2008. "The Flypaper Effect in Individual Investor Asset Allocation," Yale School of Management Working Papers amz2560, Yale School of Management.
    • Handle: RePEc:ysm:wpaper:amz2560
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