We document significant negative effects of exposure to increased automation at work on household wealth accumulation. Beyond the income and savings channels, we uncover a novel mechanism contributing to the negative wealth effects of automation that arises through the endogenous optimal portfolio decisions of households. We show that households rebalance their financial wealth away from the stock market in response to increased human capital risk induced by pervasive automation, thereby attaining lower wealth levels and relative positions in the wealth distribution. Our evidence suggests that the portfolio channel amplifies the inequality-enhancing effects of increased automation.

Contrary to the theoretical principle that higher risk is compensated with higher expected return, the literature shows that low-risk stocks outperform high-risk stocks. Using a large-scale household dataset, we provide an explanation for this puzzling result that the anomalous negative risk-return relation is only confined to those stocks predominantly held by rich households, whereas the anomaly disappears for stocks held by non-rich households and institutional investors. We find that social status concern of rich households and the induced lottery preference explain wealthy investors’ demand for high-risk stocks, leading to overpricing and low future returns for such stocks.