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Implications of Consumption-Income Sensitivity on Portfolio Decisions Among Topics Explored as School Brings Together Leading Behavioral Finance Scholars from Around the World

December 18, 2014
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Jawad Addoum (pictured), assistant professor of finance, presented research challenging the traditional life-cycle model and portfolio theory that have long been fundamental to economics.

Rather than taking into account and hedging for future income variations, as traditional models predict, households use their current income as a license to spend money, and this governs their investment decisions. That was a key finding of research by three members of the School’s finance faculty presented at the fifth annual Miami Behavioral Finance Conference, sponsored by the School. The research, conducted by George Korniotis, an associate professor, and Jawad Addoum and Stefanos Delikouras, challenges the traditional life-cycle model and portfolio theory that have long been fundamental to economics. 

As the first to explore the implications of consumption-income sensitivity and portfolio decisions, the three professors captured the attention of behavioral finance experts from around the country during Addoum’s presentation of this research. 

“We present a model with the novel prediction that the tendency to consume more when current income rises affects portfolio decisions,” Addoum told the crowd.

Over two days, 104 esteemed academics listened to presentations and discussions on 12 research papers (out of a record 196 submissions) and heard from keynote speaker Matthew Rabin, Harvard’s Pershing Square Professor of Behavioral Economics.

“This conference is important because it provides a venue for behavioral finance researchers to come together and see what’s on the cutting edge of behavioral finance and exchange ideas with other researchers who are engaged in similar types of research,” Addoum said. “We have a very diverse mix of papers as well.”

Concurred Delikouras: “This is the best program I’ve seen! This conference has come a long way, and it’s the premier conference in behavioral finance.” 

When Addoum took the floor to present “License to Spend: Consumption-Income Sensitivity and Portfolio Choice,” he explained to the crowd how the research came about.

“The three of us made an observation that consumption and portfolio decisions are fundamentally related and governed by the same preferences,” Addoum said. “What struck us when we looked at the literature is that we noticed the literature had developed in relative isolation.  People looked at consumption decisions or portfolio decisions. Households don’t seem to follow the model.”

Discussant Luis Viceira of Harvard University presented an academic critique that Addoum said he and his coauthors would take into account as they revise the paper for publication. Addoum also engaged in an intellectual exchange of ideas during a question and answer session on his presentation.

It was exactly the scenario that Thor Bruce, associate professor of finance, was hoping for when he came to see what would unfold. “It’s great for the university because it brings good exposure to the leaders of behavioral finance, which will help us in recruiting good faculty and help us build a reputation in the department,” Bruce said. “And most importantly, it helps our own faculty get published because they can collaborate with top scholars.”

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