This study incorporates a recent preference specification of expectations-based loss aversion, which has been applied broadly in microeconomics, into a classic macro model to offer a unified explanation for three empirical observations about life-cycle consumption. First, loss aversion explains excess smoothness and sensitivity—that is, the empirical observation that consumption responds to income shocks with a lag. Intuitively, such lagged responses allow the agent to delay painful losses in consumption until his expectations have adjusted. Secondly, the preferences generate a hump-shaped consumption profile. Early in life, consumption is low due to a first-order precautionary-savings motive. However, as uncertainty resolves over time, this motive is dominated by time-inconsistent overconsumption that eventually leads to declining consumption towards the end of life. Thirdly, consumption drops at retirement. Prior to retirement, the agent wants to overconsume his uncertain income before his expectations catch up. Post-retirement, however, income is no longer uncertain, and overconsumption is associated with a sure loss in future consumption. As an empirical contribution, I structurally estimate the preference parameters using life-cycle consumption data. My estimates match those obtained in experiments and other micro studies, and generate the degree of excess smoothness observed in macro consumption data.

Recent evidence suggests that investors are inattentive to their portfolios and hire expensive portfolio managers. This paper develops a life‐cycle portfolio‐choice model in which the investor experiences loss‐averse utility over news and can ignore his portfolio. In such a model, the investor prefers to ignore and not rebalance his portfolio most of the time because he dislikes bad news more than he likes good news such that expected news causes a first‐order decrease in utility. Consequently, the investor has a first‐order willingness to pay a portfolio manager who rebalances actively on his behalf. Moreover, the investor can diversify over time and his consumption aligns with predictions of mental accounting. I structurally estimate the preference parameters by matching stock shares and stock‐market non‐participation over the life cycle. My parameter estimates are in line with the literature, generate reasonable intervals of inattention, and simultaneously explain consumption and wealth accumulation over the life cycle. Here, it matters that news utility preserves first‐order risk aversion even in the presence of stochastic labor income, which also causes stock shares to rise in wealth.

This article shows that contemporaneous and lagged air pollution negatively affects the likelihood of German individual investors to log in and trade in their brokerage accounts, using intraday data and controlling for investor-, weather-, traffic-, and market-specific factors. A 1 SD increase in air pollution leads to a 1.3 percent reduction in the probability of logging in, which is larger than the response to a 1 SD increase in sunshine. We argue that changes in air pollution affect productivity in cognitively demanding tasks, such as trading. Our results are robust to macroeconomic productivity shocks, nonlinearities, or measurement error.

We use data from an online financial service to show that many consumers fail to stick to their self-set debt paydown plans. This behavior is best explained by present bias. Our empirical approach is informed by a parsimonious model showing that the sensitivity of spending to paycheck receipt reflects a present-biased agents short-run impatience, and that this sensitivity is reduced by available resources only for agents who are aware (sophisticated) of their future impatience. Classifying users accordingly, we find that (i) sophisticated users debt paydown decreases with short-run impatience, and that (ii) planned paydown is most predictive of actual paydown for sophisticated users.

We use a very accurate panel of all individual spending, income, balances, and credit limits from a personal finance software to document spending responses to the arrival of both regular and irregular income. These payday responses are robust and homogeneous for all income and spending categories throughout the income distribution. Moreover, we find that few people hold little or no liquidity. We then analyze whether people hold liquidity cushions to cope with future liquidity constraints. However, we find that peoples’ responses are consistent with standard models without illiquid savings, in which neither present nor future liquidity constraints are frequently binding. Received May 31, 2016; editorial decision September 30, 2017 by Editor Itay Goldstein.

We analyze attention to personal finances using a high-frequency panel of bank data, including information on logins. We document a number of robust patterns. Relative to their personal histories, individuals pay more attention when holding more cash and liquidity and when receiving income. In contrast, attention decreases discretely as bank account balances go from positive to negative and then decreases further as overdraft debt increases. We conclude that Ostrich effects in a personal finance context, i.e., the avoidance of obtaining information on everyday personal finances, is a widespread phenomenon and explore a number of explanations for our findings.

ABSTRACT We analyze how individuals reinvest realized capital gains and losses exploiting plausibly exogenous sales due to mutual fund liquidations. Individuals reinvest 83% if a forced sale results in a gain relative to the initial investment; but reinvest only 40% in the event of a loss. This difference is statistically significant for more than six months and arises because many individuals forced to realize a loss choose not to reinvest anything and some even exit the stock market altogether. Individuals treat realized losses differently from paper losses and are discouraged from investing more and participating in the stock market.

ABSTRACT Using an experiment in which 3.1 million bank customers were encouraged to save, we explore the mechanisms behind coholding liquid savings and credit card debt. Theoretically, we show that the joint responses of spending, saving, and borrowing to the nudge differ across economic models of coholding. Using machine learning techniques, we find that the most responsive individuals reduce spending and increase savings by 4.9% (206 USD PPP per month) while their credit card debt remains unchanged. These individuals' marginal responses to the nudge are consistent with our model of coholding for the purpose of self‐ or partner‐control.

We exploit the release of a mobile application for a financial aggregation platform to analyze how technology adoption changes consumer financial decision making. The app reduced the cost of accessing personal financial information, and we find that this led to a drop in non-sufficient fund fees. Because of the manner in which these fees are incurred, this represents an unambiguous welfare improvement for users of the platform. The leading explanation for this result appears to be mistake avoidance due to easier access to information.

Utilizing transaction-level financial data, we explore how household consumption responded to the onset of the COVID-19 pandemic. As case numbers grew and cities and states enacted shelter-in-place orders, Americans began to radically alter their typical spending across a number of major categories. In the first half of March 2020, individuals increased total spending by over 40% across a wide range of categories. This was followed by a decrease in overall spending of 25%–30% during the second half of March coinciding with the disease spreading, with only food delivery and grocery spending as major exceptions to the decline. Spending responded most strongly in states with active shelter-in-place orders, though individuals in all states had sizable responses. We find few differences across individuals with differing political beliefs, but households with children or low levels of liquidity saw the largest declines in spending during the latter part of March.