Work

Heuristic portfolio rules with labor income

Year: 2025

Type: article

Abstract: We propose a heuristic portfolio rule, which significantly simplifies individuals' asset allocation decisions over the life cycle. Under this heuristic, equity exposure is a linear function of the individual's labor-to-wealth ratio and age. When individuals follow our heuristic, welfare gains when switching to the optimal policy are only 0.35% of lifetime consumption (around USD 9,800). Relative to portfolio strategies used by individuals in the data, welfare gains from using our heuristic are about 2.2% (around USD 61,600). Our results are robust to different educational attainments and family structures.

Source: European Journal of Finance

DOI: 10.1080/1351847x.2025.2491367

Authors: Marcel Fischer, Marlene Koch

Institutions: Copenhagen Business School, University of Konstanz, Maastricht University, Network for Studies on Pensions, Aging and Retirement

Language: English

Topic: Financial Literacy, Pension, Retirement Analysis

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: hybrid

OpenAlex ID: W4409814006

FWCI: 5.38

Cites: 37

Cited by: 4

Related to: 10