THREE ESSAYS ON THE CREATION OF WEALTH, THE LIFE-CYCLE HYPOTHESIS, AND PROSPECT THEORY

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2011-05

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Abstract

The study of wealth creation is important to practitioners, government agencies, and households alike. Without resources to draw upon during retirement years, households will place a great burden on Social Security, Medicare, and other entitlement program resources to sustain life. This three essay dissertation examines the process of wealth creation and its effects. The first essay examines the effect of wealth creation upon global self-esteem. The second essay examines what variables are significant predictors of wealth creation. The third essay explores the framing effects of hypothetical stock investment choices to better understand how households perceive risk. This dissertation adds to the body of knowledge of wealth creation and provides some unique insights about global self-esteem stability and risk perception. This study finds global self-esteem to be stable over a 19-year period that includes early adulthood to middle age. The study finds a majority of investors evaluate hypothetical investment scenarios based on probability of gain when this probability information is displayed visually. The study further finds that investors can be comfortable with small loss potentials to increase the probability of receiving a gain. These findings are counter to what established prospect theory would predict and need to be investigated further with larger samples to determine how best to incorporate the findings into the body of knowledge of prospect theory. Relationships between how people think about money and wealth creation are discussed. Results from the study suggest global self-esteem enhancement initiatives should begin early in one’s life and focus on human capital attainment, healthy lifestyle, and employment. In addition, the majority of wealth differences between households can be explained by financial, human capital, demographic characteristics, financial risk tolerance, psychological state, and time preference factors. The way probability information is framed in hypothetical investment scenarios has an impact on investor stock preference. This study finds support for the prospect theory S-shaped curve. Financial planners are encouraged to use a variety of communication formats when working with clients to improve the understandability of probability information. Researchers should consider adding qualitative follow-up questions when conducting behavioral economics studies.

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Keywords

Life-cycle hypothesis, Prospect theory, Wealth, Risk tolerance, Self esteem

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