Which Comes First? The Saving Decision or the Investment Decision?
This paper tests the proposition that households make saving and investment decisions simultaneously, with an empirical analysis of 1992 Survey of Consumer Finances data. Simple calculations imply that having a high rate of return should lower the need to save out of current income. Do households decide how much to save, then decide the risk level they can tolerate, vice versa, or do they make the two decisions simultaneously? The empirical results do not support simultaneous decision-making, suggesting that consumers may not be acting optimally.
NOTE: You can view and print the 12/97 draft of the paper, to be presented at the Midwest Finance Association in March, 1998. If you are considering citing this paper, please check back for the revised version in March.
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