HEC-Ecole de gestion de l'Université de Liège
HEC-Ecole de gestion de l'Université de Liège

Dynamic programming with discrete choice : households'attractiveness towards financial investments based on SHARE database

Décembry, Emilie ULiège
Promotor(s) : Tharakan, Joseph ULiège
Date of defense : 4-Sep-2018 • Permalink :
Title : Dynamic programming with discrete choice : households'attractiveness towards financial investments based on SHARE database
Translated title : [fr] Prgrammation dynamique en dhoix discret: L'attrait des ménages pour les investissements financiers basé sur la base de données SHARE
Author : Décembry, Emilie ULiège
Date of defense  : 4-Sep-2018
Advisor(s) : Tharakan, Joseph ULiège
Committee's member(s) : Perelman, Sergio ULiège
Rostam-Afscha, Davud 
Language : English
Number of pages : 51
Keywords : [en] SHARE
[en] dynamic programming
[en] discrete choice
[en] households' financial invesmtents
[en] microeconometrics
Discipline(s) : Business & economic sciences > Quantitative methods in economics & management
Institution(s) : Université de Liège, Liège, Belgique
Degree: Master en sciences économiques,orientation générale, à finalité spécialisée en Economics and Finance
Faculty: Master thesis of the HEC-Ecole de gestion de l'Université de Liège


[en] This master thesis covers the evolution of households’ attractiveness towards risky investment over five time periods. The aim is to perform an empirical study on households’ investment decision by using the second proposition of Chou (2016) on dynamic programming with discrete choices. We defined the investment decision from households’ net total income and households’ health condition. Estimations are categorized regarding some exclusion restrictions depending on the level of education and the gender.
The gross sample used is a longitudinal sample coming from the Survey on Health, Ageing and Retirement in Europe, most commonly known as SHARE. Our final sample gathers 3,551 individuals from nine different countries which in the first period of observations, which is 2004, are aged between 50 and 65 years old. We follow the evolution of their decision until 2014. From the final sample, two important points influenced the direction of our investigation. The first one is the age range used. It represents individuals that are coming closer the retirement age or just reach that life transition. Therefore, their financial goals are different from others age range and optimal decision toward their saving allocation is required. The second is the period studied. It includes the global financial crisis. Henceforth, different behaviours are expected with respect to the period before and after the crisis.
From the literature review, two main results appear. Income from public pension is not sufficient to maintain individuals’ living standards and cover their potential need for long-term care assistance when ageing. The ageing process combined with the global financial crisis have entails important shortfalls in pension funding. This underfunded problem is also the responsibility of institutional sponsors that suffers from various distortions and individuals’ intrinsic characteristics. It is therefore up to households get more involved and become actor in the preparation of their pension by boosting their retirement savings.
From households’ budgeting rules, an optimal behaviour was determined. 20% of income has to be allocated to savings (Trulia, 2016). In addition, for age categories above 40 years old, savings should in priority be invested for retirement. Our investment decision has therefore been defined with respect to that optimal behaviour.
Our estimations enable us to observe differences in intertemporal utility expressed in terms of differences in current utility and differences in continuation for the four exclusion restrictions defined at the beginning. The poor results in differences in continuation values suggest that households’ risk aversion is important - individuals’ express negative expectations toward a future positive benefit – and that only a minority of households adopt the optimal behaviour.
Some explanations for households’ risk aversion can be founded in incentive effects and the uncertainty resulting of the global financial crisis. However, complementary investigations are necessary to obtain the full picture regarding investors risk preferences. We already covers individuals’ lack of discernment and imperfect foresight as bias interfering in their decision but we recommend to perform to study with wealth as an indicator of investment intensity and measure the risk aversion for different investment strategies.



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  • Décembry, Emilie ULiège Université de Liège > Master sc. éco., or. gén., à fin.


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