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"Household Finance and Private Retirement Provision: A Marketing Finance perspective" - Prof. Dr. Piet M.A. Eichholtz
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"Household Finance and Private Retirement Provision: A Marketing Finance perspective" - Prof. Dr. Piet M.A. Eichholtz

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"Household Finance and Private Retirement Provision: A Marketing Finance perspective" - Prof. Dr. Piet M.A. Eichholtz

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  • 1. Household Finance and Private Retirement Provision: A Marketing Finance perspective Piet Eichholtz Maastricht University
  • 2. Marketing-Finance in Maastricht The Finance perspective
    • Start in 2007, anchored on Joost Pennings
    • Unique International MSc program: Marketing-Finance Interface
    • Very close link to financial industry
      • Alex chair and database
      • Fortis chair
      • Loyalis, SNS Reaal, …
    • Good fit with earlier research lines in Finance Department
      • Mutual funds
      • Pension research
    • Very good fit with existing research in private retirement provision
      • Individual investor behavior and attitudes
      • Product development
  • 3. Alex platform provides unique perspective on private investment decisions
    • Option Trading and Individual Investor Performance
      • Rob Bauer, Mathijs Cosemans, Piet Eichholtz (2008)
    • Paper uses trading data set
      • Individual accounts between 2000-1 and 2006-3
      • 41,880 equity traders and 26,666 option traders
      • 8 million trades, almost half in equities
    • Measure impact of trading on investor performance
      • Do investors understand risk/return?
      • Do investors have behavioral biases influencing performance?
      • Do they diversify adequately?
      • How and why do they use derivatives?
  • 4. Related literature regarding private investor behavior and performance
    • Puzzling finding of prior research is excessive trading by private investors
      • Barber and Odean (2000): gains from trading insufficient to cover costs
      • Odean (1998): investors trade too much due to overconfidence
    • Investor irrationality in option markets
      • Poteshman and Serbin (2003): early exercise of options
      • Lakonishok et al. (2007): large fraction of option activity motivated by speculation
    • Strong evidence of performance persistence
      • Coval et al. (2005): small group of investors consistently beats markets
  • 5. Average Investor Performance Raw monthly returns and alphas
    • Performance attribution using extension of Carhart (1997) four-factor model
    • Option-based factors added to capture nonlineair payoffs
    • IT factor added to capture tech-related style tilts
  • 6. Investor sentiment and market timing Investors keep speculating on further market fall after recovery
  • 7. Motivations for trading options (1) Type of position: put/call, own/write, covered/naked
  • 8. Motivations for trading options (2) Selected results from online client survey
    • 4,516 responses
      • 2,323 option traders; 2,193 equity traders
    • Results suggest
      • overconfidence for option traders
      • speculation and entertainment more important for option traders
  • 9. Performance Persistence (1)
    • Existing evidence
      • Coval et al. (2005): persistent winners outperform losers by 8% per year, unexplained by size, value, momentum
      • Brown and Goetzmann (1995), Carhart (1997): mixed evidence of performance persistence by mutual funds
    • Why would individuals be able to beat the market?
      • Price impact of trades is smaller
      • Fewer asset allocation constraints
    • Approach
      • Sort investors into decile portfolios based on return during formation period, calculate decile returns in evaluation period
      • T-test on performance difference between deciles 1 and 10
      • Spearman rank correlation formation and evaluation periods
  • 10. Performance Persistence (2) Against hypothetical index fund and mutual fund
  • 11. Performance Persistence (3) Decile performances and rank ordering
  • 12. Performance Persistence (4) Investor characteristics
  • 13. Conclusions
    • Individual investors incur large losses on option and equity investments
    • Poor performance explained by bad market timing due to overreaction to past market movements
    • Trading costs and lack of knowledge contribute to losses
    • Gambling and entertainment seems motivation for trading
    • Bad performers stay bad; good performers stay good
    • Trading hurts investor performance and trading options hurts most
  • 14. Implications for private retirement provision
    • Left to their own devices, only a minority of citizens seem to be able to invest adequately for retirement
    • Some form of paternalism seems in place
    • The active mutual fund market does not provide a good answer
      • Bloated costs, too much trading, weak performance
      • David Swensen (2005): “Overwhelmingly, mutual funds extract enormous sums from investors in exchange for providing a shocking disservice.”
      • Mutual funds face a fundamental conflict of interest
    • The collective pension system has a better cost basis …
      • Bauer and Frehen (2008)
    • … but does it provide enough flexibility and choice?
  • 15. Two ways out I. Steering people towards passive strategies
    • Overwhelming academic evidence points to passive low-fee strategies
      • Exchange traded funds
      • Index funds
    • How do we get people into long term passive index funds?
      • The Swedish model (using a default fund) is a way out, but …
      • … does it steer people hard enough?
        • Many Swedes still chose top historical performer (high risk tech fund)
        • Only 4.1% of chosen funds were indexed
        • Very large home bias
      • … is the default choice the best choice for all?
        • What strategic mix of passive funds is optimal?
  • 16. Two ways out II. Life cycle and complementary portfolios
    • Optimal portfolio changes with people’s life cycle and human capital
      • Willingness to run risk
      • Ability to make up for losses on the way
    • Optimal portfolio depends on non-financial portfolio
      • Position in housing market
      • Position in mortgage market
    • Design life cycle portfolios
    • Design complementary portfolios
      • Portfolio based on ALM at the client level
    • Adjust defaults accordingly and dynamically