“Why Do Older People Quit The Stock Market? ” by Hui He
University of Hawaii
We document that in the U.S., the stock market participation rate over the life cycle decreases as people get older. This fact can not be captured by standard model where smooth expected utility function always allows decision maker stay in the stock market given positive equity premium and independence between older people's non-asset income and stock return. To explain this puzzle, we introduce Knightian uncertainty in a multi-prior utility model where agents have ambiguity towards the correlation between risky stock re- turn and uncertain health expenditure. In this environment, older people quit the stock market under some range of ambiguity towards the correlation. Within this range, they do not long stocks since they worry stocks are too much like the non-asset income. Similarly, they do not short sell stocks because they also worry that stocks and their non-asset income may co-move very negatively.