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

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