In addition, that even among the educated and financially literate, experienced and educated investors engage in return chasing, overconfidence, and myopic loss aversion, resulting in lower returns for their personally managed investments relative to diversified, passively managed ones (Benartzi and Thaler [1995], De Bondt and Thaler [1985, 1986], Gneezy and Potters [1997], Chevalier and Ellison [1996], Odean [1998, 1999], Barber and Odean [2001], Choi et al [2006], Grinblatt and Keloharju [2006]). Thus, it is unclear if fully-funded systems based on private accounts can yield more efficient outcomes and greater wealth at retirement than traditional pension models with government management.
This paper contributes to this literature by examining how investors responded to default investment risk reassignment and market volatility in Mexico’s privatized pension market for the period surrounding the financial market crash. This event and context provides insights on several levels. First, the government liberalized investment regulations for the system near the height of the financial market bubble, allowing fund managers to invest more heavily in equity indexes and real estate derivatives. Account holders were moved by age as a default into newly-created higher-risk funds. Second we can use account-level data to examine how exposure to risk and negative investment returns changed investors’ responsiveness to fees (charged with certainty) versus past returns.