Finance Seminar joint with SAFE Visitors Program: Casey G. Rothschild (Wellesley College)
Speaker: Casey G. Rothschild, Norma Wilentz Hess Associate Professor of Economics, Wellesley College Department of Economics
Titile: Sophistication and Search in Financial Markets
Abstract: We describe a novel approach to modeling financial decision-making by financially unsophisticated agents. Our approach assumes that financially unsophisticated agents are limited in their ability to process information about financial products but are otherwise perfectly rational and forward-looking as they search for appropriate investment opportunities. Our modeling approach is readily incorporated into otherwise standard lifecycle models. We provide two illustrative applications. First, we show that incorporating heterogeneity in sophistication levels can quantitatively replicate empirical patterns of heterogeneity in savings rates, stock market participation, and portfolio diversification. Second, we show that financial unsophistication can potentially resolve a non-trivial portion of the annuitization puzzle in the U.S.—but only if potential annuitants are additionally uninformed about the presence of state guarantee associations.
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