Three essays in household finance -PhD thesis-

Publication type

Thesis/Degree/Other Honours


Publication date

June 1, 2013


This thesis explores the impact of two behavioural finance concepts,
social psychology and psychology, on household financial decisions.
Under social psychology, I investigate whether the variety and intensity
of social engagement enhances stock market participation. With regard
to psychology, I examine two behavioural biases. First, I investigate
whether mental accounting influences portfolio choice in three asset
classes and whether financial advice and housing tenure increase
(decrease) the effects of mental accounts on portfolio choice. Second, I
examine whether households’ self-reported housing wealth are anchored
on published house price indices and whether anchoring bias is mediated
by market information, mortgage refinancing decisions and social
factors. The main contributions and findings in the three studies are as
follows. First, although there is an elaborate body of research
concerning the relationship between social engagement mechanisms and
portfolio choice, most studies investigate specific mechanisms in
isolation. Using three waves in the British Household Panel Survey
(BHPS), I bring together five social engagement measures in one model
and show that socially engaged individuals are more likely to
participate in the stock market. Consistent with Granovetter’s (1973)
theory of social networks I find that a weak tie (measured by social
group involvement) has a positive effect on stock market participation
whereas a strong tie (measured by talking to neighbours) has no effect.
More trusting individuals are more likely to participate in the stock
market, as are those who identify with a political party. In contrast,
the degree to which religion is important appears to have little impact.
These results are robust using different specifications. Overall, the
results of this study demonstrate that the likelihood of stock market
participation increases with the variety and intensity of social
engagement. Second, despite the established theoretical underpinnings of
mental accounting in behavioural portfolio theory (BPT) and recent
extensions, not much is known about their implications in real life
situations. I use a recent UK household survey, the Wealth and Assets
Survey (WAS), which has comprehensive information about financial assets
to investigate whether there are differences in the ownership and
portfolio share of three asset classes among individuals who exhibit no
mental account, a single mental account and multiple mental accounts,
and the conditional influences of financial advice, housing, cognitive
ability, time preference and risk tolerance. Overall I find that mental
accounting together with financial advice and housing tenure explain
variations in both the probability of ownership and portfolio share in
the three asset classes. Households that exhibit a single mental account
have low share of investments in, and are less likely to own, a risky
asset when compared to those that exhibit no mental account or exhibit
multiple mental accounts. I also find that, when compared to having no
mental account, exhibiting a single mental account or multiple mental
accounts increases both the probability and investment share in a fairly
safe asset but decreases portfolio share in safe assets. In addition,
among those that exhibit a single mental or multiple mental accounts,
financial advice decreases portfolio share in risky assets and fairly
safe assets and increases portfolio share in safe assets. Housing tenure
increases both the probability and portfolio share in risky assets,
decreases portfolio share in fairly safe assets and increases portfolio
share in safe assets. These results are consistent using multi-equation
regressions, sub-samples, reparametrised variables and poisson
regressions. Finally, as little is known about how households derive the
self-reported house prices estimates that are commonly used to
determine housing wealth, the third study examines whether households
are anchored on published house price indices. The key conjecture is
that, while assessing the values of their homes, homeowners place more
weight on house price news at the expense of property characteristics
and other market information. I find support for this hypothesis using
sixteen waves of the BHPS, multiple methods, and both regional and
national house price indices. I conclude that changes in self-reported
housing wealth are anchored on changes in published house price indices.
Specifically, ownership through a mortgage and greater financial
expectations increase anchoring effects while mortgage refinancing
decreases the effects. Moreover, use of money raised from refinancing
for home investment, as opposed to other consumption purposes, has a
positive association with change in self-reported house value and both
uses reduce anchoring bias. In addition, I find that computer use
increases anchoring bias and, among social engagement mechanisms,
religiosity reduces anchoring while other measures have no effect. These
results are robust to internal instrumental variables, national
aggregate house prices, alternative indices and sub-samples.




Under Embargo until 31/5/2016

Not held in Research Library - bibliographic reference only



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