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PRELIMINARY AND INCOMPLETE Flypaper Effects in Asset Allocation

By James J. Choi, David Laibson and Brigitte C. MadrianJames J. Choi, David Laibson and Brigitte C. Madrian


We thank Hewitt Associates for providing the data analyzed in this paper. We are particularly grateful to Lori Lucas, Pam Hess, Yan Xu and Greg Tabackman, some of our many contacts at Hewitt. We appreciate the research assistance of David Borden, Ananya Chakravarti, Chris Nosko, and Neel Rao. Choi acknowledges financial support from the Mustard Seed Foundation. Choi, Laibson, and Madrian acknowledge individual and collective financial support from the National Institute on Aging (grants R01-AG-021650, P30-AG012810, and T32-AG00186).Flypaper Effects in Asset Allocation Abstract: We document a flypaper effect in individual investors ’ asset allocation. We study a firm that twice changed the rules governing the asset allocation of its 401(k) employer matching contribution flows. These changes were economically neutral because after the matching contributions were made, employees could freely reallocate their match account assets. But we find that money sticks where it hits. Employees rarely reallocated their match account, and they did not adjust the asset allocation in their own-contribution account within the 401(k) to compensate for their match account allocation. Thus, these rule changes caused dramatic overnight shifts in employees ’ asset allocations. We argue that mental accounting and investor inertia generate the flypaper effect. The flypaper effect may explain some of the anomalously high voluntary holdings of employer stock in 401(k) plans

Year: 2007
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