Working Paper
Do behavioral biases adversely affect the macro-economy?
Kumar, Alok; Korniotis, George M. (2008)
This study investigates whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. We focus on the risk sharing (or income smoothing) role of financial markets and demonstrate that risk sharing levels are higher in U.S. states in which investors have higher cognitive abilities and exhibit weaker behavioral biases. Further, states with better risk sharing opportunities achieve higher levels of risk sharing if investors in those states exhibit greater financial sophistication. Among the various determinants of risk ...
Finance and Economics Discussion Series , Paper 2008-49