This paper extends the traditional life-cycle hypothesis to allow for rewards from consumption and savings. In the new model, the utility function depends both on consumption and savings, resulting in differing marginal propensities to consume (DMPC) from current income, current wealth, and...

We propose a novel human capital model that decomposes aggregate income risk into high- and low-income risk. We find that high-income risk is priced, while low-income risk is insignificant. The high-income factor alone explains 77% of the cross-sectional variation in the twenty-five size and...

The classical economic order quantity (EOQ) model with planned penalized backorders (PB) relies on postulating a value for the backorder penalty cost coefficient, b, which is supposed to reflect the intangible adverse effect of the future loss of customer goodwill following a stockout....

Using a demographics-based proxy for smartness, we show that the portfolio distortions of “smart” investors reflect an informational advantage, while the distortions of “dumb” investors reflect psychological biases. Specifically, smart investors outperform dumb investors by about 3%...

We examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives. Economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns...

We investigate whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. Focusing on the income risk-sharing role of financial markets, we find that risk sharing is higher (more than double) in U.S. states where...

This paper introduces a consumption-based capital asset pricing model (CCAPM) that combines undiversifiable income shocks and external habit formation. Using US state-level data, the paper provides realistic estimates for preference parameters when the external habit of the state investors is...