Get ahead of the Joneses: Social Status

Project Start: 01/2017
Status: Completed
Researchers: Holger Kraft, Christoph Kühn, André Meyer-Wehmann
Category: Household Finance
Funded by: LOEWE

This project was part of the team project "Social Finance – Finance and the Consumer".

Topic and Objectives

This project studies a model in which agents continuously benchmark own wealth with that of their peers. The explicit investment strategy shows that agents increase their risky portfolio share in an attempt to outperform other agents. As the desire to be better than the other agent increases, agents shift their funds into the more risky asset. The same holds for a setting with more than two agents. Extending the model by also incorporating benchmarking in consumption shows that compared to a standard model, agents invest a higher fraction in the risky asset and accumulate more wealth over their life.

After the LOEWE Funding ended, this project evolved into the DFG-funded research project “Consumption-portfolio choice and asset pricing with preferences for social status”. As a result, we have been able to publish the paper Dynamic Asset Allocation with Relative Wealth Concerns in Incomplete Markets, which is joint work with André Meyer-Wehmann (Goethe University) and Frank Seifried (University of Trier), in the Journal of Economic Dynamics and Control in 2020. 

Key Findings

  1. Social preferences change the investment behavior of agents.
  2. In general, agents with social preferences invest riskier.
  3. The stronger the effect of social preferences, the more agents behave as if they had preferences captured by log-utility.

 

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