Endowment effects in the field: Evidence from India’s IPO Lotteries

Winners of randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold these shares than lottery losers 1, 6, and even 24 months after the random allocation. This finding persists in samples of highly active investors, suggesting along with additional evidence that this “endowment effect” is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. These results provide field evidence derived from the behavior of 1.5 million Indian stock investors consistent with the laboratory literature that documents endowment effects for risky gambles.

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The effect of experience on investment behaviour: Evidence from India’s IPO lotteries

We exploit the randomized allocation of stocks in 54 Indian IPO lotteries to 1.5 million investors between 2007 and 2012 to provide new estimates of the causal effect of investment experiences on future investment behavior. We find that investors experiencing exogenous gains in IPO stocks (the treatment) are more likely to apply for future IPOs, increase trading in their portfolios, exhibit a stronger disposition effect, and tilt their portfolios towards the sector of the treatment IPO. Treatment effects vary with the characteristics of the treatment (size, variability, and salience of the gain), and are stronger for smaller and younger accounts. Treatment effects persist for larger and older accounts, suggesting that experiencing gains exerts a powerful force even on sophisticated players.

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The Indian household finance landscape

Using the most recent wave of the AIDIS data, we describe and attempt to explain several important features of Indian household balance sheets. When compared with data on households in a range of developed and emerging economies, Indian households on average tend to hold a high fraction of non-financial assets with particularly high relative weights in real estate and gold, hold negligible retirement assets, and non-institutional debt is their primary source of debt. These propensities are also evident along the lifecycle, as well as at almost all points in the wealth distribution, and correlated with location (rural vs. urban), education, and family composition. Controlling for demographics, substantial state-level variation remains in asset and debt holdings which is related to state-level factors including historical inflation volatility, the share of the population in public sector employment, and the density of bank branch networks. We discuss the potential implications of these results for policy.

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