Equity Culture

Yannis Bilias
Dimitris Georgarakos
Michael Haliassos
Equity Culture and the Distribution

of Wealth
Discussion Paper 2008 - 010
March 6, 2008
Equity Culture and the Distribution of Wealth#

Yannis Bilias, Dimitris Georgarakos, Michael Haliassos
March 6, 2008
Abstract
Household participation in stockholding has grown dramatically since the late 1980s,
partly due to the demographic transition. Increased tendency of households to manage
riskier portfolios and retirement financing creates challenges, especially for small
investors, with unclear implications for financial markets and for the distribution of
wealth. Our findings, based on SCF data, imply that during the stock market upswing
the share of small investors increased, but entries and exits during the subsequent
decline resulted in a stockholding pool more prone to sizeable stock holdings, partly
because of changes in configuration of financial attitudes and practices within the
pool. Study of the reported incidence of cumulative stock market gains and losses
reveals a significant role of heterogeneity in terms of characteristics, attitudes, and
practices, especially during downswings. This role is quite pronounced for mutual
fund holdings, contrary to beliefs that investments in managed accounts are simpler.
As regards the broader implications for the distribution of wealth, we show that equity
holdings, unlike housing, have become quite important for overall net wealth
inequality, despite limited participation and portfolio shares in household assets.
Inequality indices suggest that progressively widening access to the stock market was
not associated with a more equal distribution of either stock wealth or net wealth.
Yannis Bilias:
University of Cyprus and CFS
Dimitris Georgarakos: Goethe University Frankfurt and CFS
Michael Haliassos:
Goethe University Frankfurt, CFS, and MEA
Keywords: Stockholding, equity culture, household finance, wealth distribution.
We thank Chris Carroll, Gikas Hardouvelis, Dirk Krueger, Jos Machado, Miquel Pellicer,
Luigi Pistaferri, Susan Rohwedder, Gregory Siourounis, Arthur van Soest, Jonathan Skinner,
Nick Souleles, Maarten van Rooij, Paul Sderlind, Steve Zeldes, participants at the NBER
Summer Institute, the Mannheim RTN Conference, the Utrecht Netspar conference; and
seminar participants at Aberdeen, Athens University of Economics and Business, Central
European University in Budapest, Frankfurt, Netherlands Central Bank, Oxford, Piraeus, and
St. Gallen for very useful comments. We are grateful to NETSPAR for financial support
through a competitive research grant. This work has also been supported by the Center for
Financial Studies under Research Program Household Wealth Management, while early
stages were supported by the European Community's Human Potential Program.
1. Introduction
Participation and portfolio shares of households in risky assets, especially
direct and indirect stock holdings grew substantially over the 1990s.1 The increase in
stockholding participation has been dramatic, mainly in response to stockholding
opportunities introduced through mutual funds, individual retirement accounts and
defined contribution pension plans. A major driving force has been and will be in
years to come - the demographic transition and the need for households to accumulate
assets on their own in order to finance retirement.
The resulting expansion of the stockholder base is often thought of as
facilitating wealth enhancement and reduction in wealth inequality through wider
access to the equity premium. Yet stocks are a risky instrument and one complicated
to use, especially for households with limited experience, information, and financial
sophistication. Indeed, the stock market participation literature has established that
certain characteristics, such as being wealthier or more educated, make a household
more likely to overcome entry costs and become a stockholder.2 Thus, as stockholding
participation spreads, the composition of the stockholder pool changes through the
addition of households with no or limited previous experience with risky financial
assets. How people handle stockholding opportunities, whether and how
heterogeneity matters for stockholding levels and outcomes and ultimately for the
distribution of wealth are all difficult empirical questions with potentially important
implications for theoretical research on heterogeneous agent models and for policy
debates on expanding the use of retirement accounts, promoting financial education,
and regulating provision of financial advice.
This paper uses household portfolio data from three waves of the US Survey
of Consumer Finances between 1989 and 2001, which encompasses the period of
continuous spread of stock market participation through the stock market upswing and
the aftermath of the downswing, and a battery of econometric techniques to study a
number of questions. How did the composition of the stockholder pool change during
the 1990s upswing and in the aftermath of the downswing alongside continuous
increases in stock market participation? How did the changed composition influence
stockholding levels across the distribution of stockholders? What role did changes in
configuration of financial attitudes and practices play in determining stockholding
levels and outcomes? Do they matter less for making gains and avoiding losses in
mutual funds, which are run by professionals rather than by households themselves?
What happened to the wealth distribution through the upswing and the downswing? Is
there evidence that stock wealth seriously influences the overall distribution of net
wealth, despite limited participation and typically limited shares of stocks in
household portfolios?
Our findings imply that during the stock market upswing the share of small
investors increased, but entries and exits during the subsequent decline resulted in a
stockholding pool more prone to sizeable stock holdings across the distribution. Part
of these changes can be attributed to changes in financial attitudes and practices
within the stockholder pool (a dilution during the boom and a subsequent
cleansing during the downswing). Study of the reported incidence of cumulative
gains and losses reveals a systematic role of heterogeneity in terms of characteristics,
attitudes, and practices, especially during downswings. This role is even more
pronounced for mutual fund holdings compared to direct holdings, contrary to popular
beliefs that investments in managed accounts are simpler. Moreover, we show that
stock market wealth has become quantitatively important for overall net wealth
inequality, despite limited participation and portfolio shares in household assets
(unlike the largest asset for most households: housing). Inequality indices show that
progressively widening access to the stock market was not associated with a
progressively less unequal distribution of either stock wealth or net wealth.
These questions seem particularly relevant in a world which, faced with the
demographic transition, is consciously shifting responsibility for financing retirement
away from Social Security and towards households themselves (e.g. through definedcontribution pension plans and individual retirement accounts). Indeed, evidence for
the potential of households to mishandle stock investments is starting to accumulate.
Households with lower education and resources have been shown to be more prone to
investment mistakes in terms of (non)participation, (under)diversification, and (lack
of) debt refinancing (Campbell, 2006). Calvet, Campbell, and Sodini (2006) find,
using Swedish data, that mistakes are disproportionately present among groups of
lower education and resources. Poor understanding of investment options has also
been linked to lack of international diversification and planning for retirement
(Graham, Campbell, and Huang, 2005; Lusardi and Mitchell, 2007, respectively).
Wealth inequality is of interest both in its own right and because households at
different points of the wealth distribution tend to exhibit different financial and
entrepreneurial behavior.3 Existing theoretical literature on increased stock market
participation and wealth inequality is rather limited, but already points to conflicting
effects. Some papers emphasize that broadening access to a financial instrument
offering an expected return premium would tend to reduce wealth inequality (see
Arrow, 1987; Guvenen, 2006). Guvenen shows that limited stock market participation
can account for much of US wealth inequality, which suggests that expanding
participation should reduce wealth inequality. Ambiguities arise, however, even in
stylized models once full financial information and sophistication are not taken for
granted among all participating households (Peress, 2004).4
The rest of the paper is organized as follows. Section 2 investigates
econometrically whether the spread of equity culture drew progressively smaller
stockholders into the stockholder pool, i.e. households with characteristics, attitudes,
and practices that tend to be associated with smaller stockholding levels. Section 3
reports estimates of the systematic role that household characteristics, attitudes, and
practices play for the incidence of stockholding gains and losses, distinguishing
between direct stockholding and mutual funds; and between stock market upswing
and downswing. Section 4 measures and decomposes into various sources, net total
wealth inequality in the US over a period of growing participation, and a stock market
upswing followed by a downswing. It demonstrates, inter alia, the growth in
importance of stockholding for the overall distribution of net wealth. Section 5 offers
concluding remarks.
2. Increased participation and the transformation of the stockholding pool

In this section, we use data from SCF for 1989, 1998, and 2001 to uncover the
underlying transformation of the stockholding pool as participation spread. We provide
extensive details on the data, asset categories, and variable definitions in Appendix C.
Existing literature on participation in stockholding, direct and indirect, shows
consistently that certain characteristics make it more likely that a particular household
will be drawn into the stockholder pool. We report in Table 1 marginal effects from
probit regressions, for each of the three survey years, that control for a similar array of
demographic and pecuniary characteristics to that employed in relevant studies (see, for
example, the empirical contributions in Guiso, Haliassos and Jappelli, 2001).5
Consistent with existing literature, we find that being affluent, more educated, and less
risk averse contribute to the probability of owning stocks (held directly and indirectly),
controlling for other factors. These results imply that certain characteristics contribute
to the probability of being a stockholder, and that the composition of the stockholder
pool changes in general as stock market participation spreads.
In Table 2 we present summary statistics on three factors often considered as
key for stock investments, namely education, income and (non-equity) net wealth.
These statistics show notable changes in the composition of the expanding
stockholder pool, both in absolute terms and relative to the population. While they do
suggest an increase in the share of marginal and less educated stockholders during
the upswing, they fail to indicate a continuation of this trend through the downswing.
Specifically, by 1998 the share of college graduates among equity holders was
somewhat reduced to 46.8%, while in the population it increased by almost 6
percentage points. In addition, both the mean and median non-investment income
among equity holders is lower in 1998 compared to 1989, while in the population it is
considerably higher, by 10% and 6%, respectively. A similar picture emerges when
we look at net wealth.
However, by 2001 college graduates among equity holders reach 49.6%, an
increase of almost 3 percentage points within just three years, while their population
share remains unchanged. They also show significant increases at all percentiles of
income and wealth distribution (for instance, median non equity net worth increased
two times more among equity holders compared to the population). If anything,
summary statistics suggest that the composition of stockholders shifted against
marginal investors during the downswing, despite increased participation.
2.1. The Composition of the Stockholder Pool: Counterfactual Distributions

Changes in stockholding levels across the entire distribution result partly from
changes in market conditions (such as an upswing or a downswing) and partly from
changes in the configuration of stockholder attributes. While summary statistics of
isolated household characteristics can be suggestive, they fail to give a picture of
changes in the overall configuration of relevant characteristics controlling for changes
in stock market conditions. In this section, we use recent advances in construction of
counterfactual distributions to decompose observed changes in equity holdings into
the influence of characteristics and the influence of market conditions. This allows us
to examine whether more and more marginal stockholders likely to exhibit smaller
stockholding levels were drawn into the stockholder pool, as participation spread.
We apply a variant of a technique proposed by Machado and Mata (2005),
described in Appendix B, to decompose the change in the distribution of equity
holdings between two years into (i) a component due to the change in the distribution
of covariates; and (ii) a component due to changes in the coefficients on these
covariates at various percentiles. This is done by running quantile regressions6 and
constructing counterfactual distributions.
When comparing two different years, say 1998 to 1989, the relevant
counterfactual distribution is the (logarithm of) equity holdings that stockholders in
1989 would have if, given their own characteristics, they experienced the same
influence of characteristics on equity holdings (coefficient effects) as those
experienced by stockholders in 1998. The difference between the 1998 and 1989
distributions of equity holdings at each percentile is decomposed into:
f ( y 98 ) f ( y 89 ) = { f ( y 98 ) f * ( y; X 89b98 )} + { f * ( y; X 89b98 ) f ( y 89 )} (1)
where y represents the log of equity wealth, X is the data matrix and b is a vector of
estimated quantile regression coefficients evaluated at various percentiles. The
difference in the first curly brackets represents the contribution of household
characteristics to the overall difference between the 1998 and 1989 distributions of
equity holdings. The difference in the second curly brackets measures the contribution
of differences in coefficients.
The coefficient and covariate effects for 1998-1989 are presented in Figure 1a.
Differences in distributions of equity holdings over this period are mainly driven by
coefficient effects, and these become progressively more important at higher
percentiles of the distribution. This is consistent with the exceptionally strong upward
movement of stock market indices over this period and it suggests that a given change
in characteristics has more important effects, during upswings, on the equity wealth of
households with sizeable equity holdings.
On the other hand, covariate effects are negative, implying that the
combination of 1989 characteristics with 1998 coefficients would generate even
higher equity holdings than what was actually observed for the 1998 stockholders. In
other words, the overall distribution of shareholder characteristics in the wider
stockholder base at the end of the 1990s was not as conducive to high equity levels as
the 1989 distribution. This was most evident among households with large equity
holdings.7
On the basis of 1989-1998 comparisons, one might be tempted to conclude
that the conjecture of progressive dilution of the stockholder base with smaller
stockholders as participation grows is accurate. However, when we compare 1998
with 2001, findings are actually reversed (Figure 2a). The decomposition is as
follows:
f ( y 2001 ) f ( y 98 ) = { f ( y 2001 ) f * ( y; X 2001b98 )} + { f * ( y; X 2001b98 ) f ( y 98 )}
(2)
We find that coefficient effects are negative, but covariate effects on equity holdings
(displayed in the second curly brackets) are positive and increasing beyond the 40th
percentile of the distribution of stock wealth. This implies that a stockholder pool with
the configuration of stockholder characteristics of 2001 would have had higher equity
levels in 1998, compared to those actually observed for 1998 stockholders. In turn,
this suggests an improvement of the pool between 1998 and 2001, despite the
continuing overall increase in participation. These, combined with our findings for
1989-1998, point to the conclusion that stock market conditions are crucial: increased
participation appears to draw marginal investors during booms, but during
downswings the balance is tilted towards bigger investors, presumably through more
pronounced exits among small investors.
2.2. A Role for Financial Attitudes and Practices?
So far, we have used the terms large or small (marginal) investor merely
to depict their likely level of stockholding, but without asking whether this level is
optimal for stockholders with these characteristics, or whether it can be traced partly
to (possibly suboptimal or misguided) financial attitudes and practices. Are marginal
investors small simply because this is optimal given their characteristics, or also
because of the way they approach stock investments? This issue is particularly
relevant for understanding the implications of increased reliance on household
decision making for managing riskier portfolios and providing for retirement.
As a first step, we extend our counterfactual analysis in order to estimate the
effect of changes in configurations of financial attitudes and practices within the
stockholder pool. We are conservative in what we include under attitudes and
practices, in that we do not include factors such as education, which help shape
attitudes and inform practices but also determine the income process faced by the
household. In this sense, we are likely if anything - to underestimate the quantitative
importance of attitudes and practices. We consider three factors under financial
attitudes and practices, namely reported willingness to take more than average risk,
reporting a long investment horizon (in excess of 10 years), and financial alertness
(defined as shopping around extensively for the best terms before making major
borrowing and saving decisions).
We perform the following sequential decomposition:
89 98
f ( y 98 ) f ( y89 ) = { f ( y 98 ) f ** ( y; X 98
f , X a , b )}
89 98
*
89 98
+ { f ** ( y; X 98
f , X a , b ) f ( y; X b )}
+ { f * ( y; X 89b98 ) f ( y89 )}
(3)
where the counterfactual f** represents the equity wealth distribution that would have
prevailed in 1998 if the configuration of financial attitudes in the stockholder pool
were distributed as in 1989. The term in the second curly bracket shows the relative
contribution of other household characteristics (which we can call fundamentals).
Figure 1b exhibits this decomposition of covariate effects for the 1989 to 1998
period. The shaded area represents the effects of changes in covariates conservatively
assigned to economic fundamentals. Our estimates based on this exercise imply a
considerable contribution of financial attitudes and practices throughout the
distribution of equity holdings, but especially at the upper end of the distribution.
Figure 2b carries out an analogous exercise for the period between 1998 and
2001. Here we use the following sequential decomposition:
f ( y 2001 ) f ( y 98 ) = { f ( y 2001 ) f * ( y; X 2001b98 )}

2001 98
+ { f * ( y; X 2001b98 ) f ** ( y; X 98
, b )}
f , Xa
2001 98
+ { f ** ( y; X 98
, b ) f ( y 98 )}
f , Xa
(4)
Results are quite similar, with greater room for effects of attitudes above roughly the
70th percentile of the distribution of equity holdings.
Thus, counterfactual analysis suggests that the period 1989-1998 has
witnessed a dilution of the composition of the stockholder base, as more marginal
stockholders were drawn into the market. The subsequent, 1998-2001 period is even
more interesting, as it seems to combine an improvement in the composition of the
stockholder base coupled with an increase in overall participation. To put it
differently, our findings suggest that the stock market downswing has had a
cleansing effect on the stockholder pool, by encouraging investors with poorer
financial attitudes and practices to leave and (a slightly larger number of) investors to
enter with attitudes and practices more conducive to high equity wealth levels.8
3. Who Gains and Who Loses in the Stock Market?
We now turn to examining directly the systematic role of household

characteristics, attitudes, and practices in making overall gains in the stock market and
in avoiding losses. The SCF contains responses on the incidence of stockholding gains
or losses based on the cumulative experience of each stockholder by 1998 or 2001
(though without knowledge of when stocks were initially acquired). We first present
some tables describing the incidence of these responses in the population and across
different education categories. We then report our findings from econometric analysis
of the contribution of various household characteristics, including financial attitudes
10
and practices, to experiencing cumulative gains or losses in stockholding by 1998 and

then by 2001, separately for direct and indirect stockholding through mutual funds. 9
3.1.
Descriptive analysis
Table 3 shows the experience that the three education categories had with stock
market gains and losses by the end of 1998 and 2001. By 1998, 80% of all direct
stockholders were experiencing cumulative gains on their direct stock investments. The
incidence of gains was increasing in education, but the incidence of losses was the same
across the board. By 2001, the percentage of equity holders declaring cumulative gains
in direct stock investments dropped to 53%, with a steeper education gradient, both for
gains and for losses.
Mutual fund investments are generally considered as being less demanding for
households, since portfolios are diversified and managed by professional fund
managers. However, in view of the proliferation of mutual funds, whose number is now
of the same order as the number of individual stocks, the question of which stocks to
hold has been replaced by the equally pressing questions of which mutual funds to hold
and of how to pick qualified advisors. In Table 3, one does find greater incidence of
cumulative gains and smaller incidence of cumulative losses for mutual funds in each
of the two years, though marginally so for losses in 2001. Yet, Table 3 also shows that,
in both 1998 and 2001, cumulative gains and losses for mutual funds were much more
differentiated across education categories than the corresponding rates for direct
holdings of stock.
3.2.
Regression Analysis
We turn next to regression analysis of the incidence of gains and losses from
11
stockholding, conditional on participation, in order to estimate the contributions of

given household characteristics, attitudes, and practices, controlling for the remaining
ones. We model the incidence of cumulative gains and losses using two-stage probit
regressions that allow for selection. The first step models the probability of owning
directly stocks (or mutual funds, respectively), and the second is observed only if
households are direct stockholders (or mutual fund shareholders, respectively). The first
step specification is the same to the one presented in Table 1. The model uses as
exclusion restrictions the variables intension to leave a bequest and save for rainy
days, which are assumed to affect the probability of owning the asset in question but
not to determine the incidence of gains or losses.10 We run two such estimations for
1998 (one for gains and one for losses), and two for 2001, separately for direct and
indirect stockholding.11
Our estimation allows for correlation among unobserved factors contributing to
the probability of the cumulative outcome and to the probability of stock ownership of
the relevant type. When the correlation is statistically significant, we report conditional
marginal effects from two-stage probits that have taken into account selection bias.
When it is statistically insignificant, we report marginal effects from standard probits
on the restricted subsamples of direct (or mutual fund) shareholders.
Results for direct stockholding and mutual funds in 1998 and 2001 are reported
in Tables 7 and 8, respectively. As before, we examine the effects of three aspects of
financial attitudes and practices, namely willingness to take more than average risk,
long investment horizon, and financial alertness. In addition, we control for portfolio
breadth (the number of shares or mutual funds held), and for whether the household
reports that it makes use of professional advice (this information is available only for
waves 1998 and 2001).12
12
Portfolio breadth has a positive and statistically significant contribution to the

probability of achieving cumulative gains in direct stockholding by 1998 (Table 4).
Neither having a long investment horizon (in excess of 10 years) nor using professional
advice make a statistically significant contribution to cumulative gains among
stockholders in the stock market boom of 1998, controlling for other factors.
Interestingly, once we control for financial attitudes and practices, we no longer find a
statistically significant role for educational attainment in achieving cumulative gains in
1998. Findings in column 3 which examines the incidence of the less likely outcome of
cumulative losses by 1998 are consistent with those.
Education, some financial attitudes and practices, and certain other factors that
made no significant contribution in boom times, gain statistical and quantitative
significance in the period encompassing the downswing (cols. 4 and 5). As in the boom,
portfolio breadth is statistically significant in facilitating cumulative gains among direct
stockholders and in reducing the probability of cumulative losses. However, the same is
true now for having an investment horizon longer than 10 years, with marginal effects
of the order of 6 percentage points. In addition, willingness to take more than average
financial risk significantly affects the probability of making gains. Estimated marginal
effects of using professional advice are insignificant (marginally for gains) and of the
wrong sign for direct stockholders.
Even after controlling for financial attitudes and practices, a college degree is
estimated to make a difference in producing good outcomes in bad times. It has a
remarkably large and significant positive effect on the probability of surviving the
downswing with cumulative gains, raising it by 15 percentage points. Although it is
also estimated to reduce the probability of losses, the effect is not statistically
significant.
13
Having received an inheritance or substantial assets in a trust or in some other

form also makes statistically significant and sizeable contributions to the incidence of
cumulative gains and to avoiding cumulative losses in bad times, of the order of about 9
percentage points. Since wealthier households are more likely to be leaving bequests,
households who have received an inheritance are likely to have also inherited a
portfolio structure and some of the financial expertise that contributed to making the
previous generation wealthy.
Table 5 presents results for indirectly held equity. In the period ending in 1998
(cols. 2 and 3), the only notable statistically significant effects refer to breadth in
mutual fund holdings and willingness to take above average financial risks. The
relevance of the former suggests that the degree of diversification inherent in any given
mutual fund, though greater than that typically observed among direct stockholders, can
be further improved upon by combining a number of different mutual funds. In these
good times, education, length of investment horizon, financial alertness and use of
professional advisors made no significant contribution to the outcomes.
As for direct stockholding, a number of factors become significant for making
gains and avoiding losses in the period encompassing the downswing. A college degree
is estimated to have increased the probability of cumulative gains among mutual fund
holders by a staggering 28 percentage points, and to have reduced the probability of
losses by 23 percentage points, controlling for other factors. Indeed, college education
is estimated to have greater impact on the probabilities of gains and of losses for the
commonly thought as softer option of indirect stockholding than for direct
stockholding.
Financial attitudes and practices are also important. Portfolio breadth is found to
have a strongly statistically significant marginal effect, despite the diversification
14
inherent in holding even a single mutual fund. Holding shares in more funds increases
the probability of cumulative gains and reduces that of losses in mutual funds by 2001.
Having an investment horizon longer than 10 years also contributes to gains and to
avoidance of losses, by about 7 percentage points.
As in all our previously reported regressions, use of professional advice failed to
make a significant difference to the cumulative outcome (beyond any influence it may
have had in lengthening the horizon and in broadening the portfolio of the household)
and showed counterproductive signs during downswings. These findings cast some
doubt on the overall quality or scope of professional advice given to households, as
long as we view the use of such advice as being a function of exogenous factors, such
as ignorance or lack of time on the part of the household to delve into the intricate
details of financial decision making.13
Finally, being a male or white non-Hispanic mutual fund shareholder raises the
probability of surviving the downswing with cumulative gains and lowers the
probability of experiencing cumulative losses. Estimated conditional marginal effects
are sizeable in both cases. Part of these effects may be due to the race variable proxying
for future income prospects, but it may be additionally suggesting that the mutual fund
sector is targeting minority households less aggressively.
All in all, results in this Section suggest that the incidence of cumulative gains
or losses in direct stockholding or in mutual funds is not simply determined by overall
stock market performance but also by household characteristics, including financial
attitudes and practices of investing households.14 Education, portfolio breadth, and
length of investor horizon are both statistically and quantitatively significant for making
gains and avoiding losses in stockholding, especially in the aftermath of stock market
downswings.
15
Given that household participation in stockholding is far from universal; and

that invested amounts cannot be compared to the major asset for most households,
namely the value of the primary residence, how important can stocks be for the overall
wealth distribution? Even if stock market swings change the levels of household equity
wealth and even if some households are better able to handle the challenges of
stockholding, can we expect the increased participation and the amounts that are
invested in stocks to have a visible effect on the distribution of net wealth and its
changes over time? It is to these questions that we now turn.
4. How important is Stockholding for Net Wealth Inequality?
In this Section, we document changes in inequality of net total wealth among

US households between 1989 and 2001 and investigate the importance of
stockholding for these changes.15 The first subsection computes net wealth inequality
indices to show that different parts of the distribution of net wealth have been affected
quite differently over this period, rendering blanket statements about net wealth
inequality misleading. The second subsection presents inequality decompositions by
asset components to show that, despite the rich pattern of inequality changes,
stockholding has become dramatically more important for net wealth inequality
regardless of whether we focus mainly on inequality at the upper end or in the middle
of the distribution.
4.1. How has Net Wealth Inequality Changed?
Data from SCF are particularly well suited for analysis of the wealth
distribution, since they over sample the rich and they are not subject to top-coding of
wealthy households carried out in other surveys.16 We first compute four commonly
16
used measures of inequality, which are sensitive to changes in different parts of the
distribution17: Mean logarithmic deviation (MLD), Theil, Half of Squared Coefficient
of Variation (HSCV), and Gini. Theils index is influenced by the relative distance
between the rich and the poor, attaching more weight to transfers at the lower and
upper ends. HSCV is very sensitive to changes in the upper tail of the distribution: it
is very sensitive to inequality at high wealth levels but less so to inequality at other
regions of the distribution (Cowell, 1977; Shorrocks, 1980). Gini is more sensitive to
the middle of the distribution.
Table 6 reports computed values of four inequality indices for net overall
wealth in 1989, 1998, and 2001.18 MLD records a sizeable decrease in inequality
between 1989 and 1998, followed by an increase to a level in 2001 that falls short of
inequality at the starting point. Theil and HSCV record increased inequality in 1998
compared to 1989, followed by a reduction in inequality between 1998 and 2001.
Finally, Gini records a slight increase in net wealth inequality over time.
The patterns we observe, especially the movements in HSCV and Theil,
suggest that net wealth inequality at the upper end of the wealth distribution increased
during the stock market upswing of the 1990s and diminished during the subsequent
downturn. The increase in the Gini coefficient suggests some increase in inequality
among middle net-wealth classes throughout the period under examination.
4.2. The Growth in Importance of Stockholding for Net Wealth Inequality
Appropriate decompositions of inequality indices allow us to investigate the

relative importance of different asset components of net total wealth for generating
inequality at different points in the distribution. Inequality in a variable W in a given
17
year, IW , can be expressed as an exact sum of the contributions made by its various
factor components:
IW = S f
(5)
A factor component contributes to increased (reduced) inequality if S f > 0 (<0). The

share of a particular factor f, s f , in generating inequality is defined as: s f =
thus:
Sf
IW
, and
= 1 . Here we focus on the top of the distribution (which accounts for the
main bulk of equity holdings) using the HSCV, and on the middle of the distribution
using the Gini. Despite their recorded differences, both point to the substantial growth
in importance of stockholding.
4.2.
Decomposition of HSCV by Source
HSCV has desirable decomposability properties and it can handle the regular
incidence of zero assets.19 Shorrocks (1982) proved that, under certain axioms, there
is a unique decomposition rule, according to which the proportionate contribution of
factor f can be derived for a broad set of inequality measures from:
sf =
cov( f , W )
(6)
W2
This is actually equivalent to the OLS estimated slope coefficient from the regression
of wealth factor f on net total wealth W.
When inequality is summarized by HSCV,
s f = fW f
18
If
IW
(7)
This expresses the proportionate contribution of factor f in terms of factor correlation

with total net wealth fW , the factors share in net total wealth f , net total wealth
inequality IW and the factor inequality I f , both measured by the HSCV. Thus, the
absolute contribution of factor f is: S f = fW f IW I f .
The percentage of factor owners n +f and the inequality they exhibit among
them I +f have a - disproportionate and proportionate, respectively - effect on the
1
factor contribution to inequality, given in approximation by: I f = +
n
f
+
( I f + 1) 1
(Jenkins, 1995). Hence, in our tables presenting wealth decompositions, we report

along with factor correlations, factor shares, and factor inequalities, percentages of
factor owners, and within factor inequalities.
Finally, we also compute a measure of each factors contribution to the
evolution of inequality over time. A factor making an important contribution to total
inequality in a given year does not necessarily play a prominent role in inequality
changes over time. Following Jenkins (1995) we decompose HSCV trends over time
as: %I =
I t +1 I t
= s f %S f , where a large positive value of s%S suggests an
It
f
important role for factor f in raising total inequality over time.

Table 7 shows decompositions of inequality by source, as measured by
HSCV.20 Stock holdings are not the dominant source of net wealth inequality, but
neither is primary residence that forms the biggest part of most households portfolio.
Indeed, wealth in primary residence has a much smaller effect on net wealth
inequality than stockholding, and one not consistent with the overall trend.21
19
The factor with the greatest proportional contribution to net wealth inequality
is risky real assets (business equity and investment real estate excluding primary
residence), which make a more than 50 percent contribution in all three years (1989,
1998, 2001). Yet ownership rates of risky real assets do not exhibit any strong trend
between 1989 and 2001, hovering around 27 percent. Risky real assets exhibit high
degree of inequality and high correlation with overall net wealth, but in 1998, the year
that overall inequality spikes by the HSCV measure, the absolute factor contribution
of risky real assets and business equity increases only slightly (from 10.16 to 11.63).22
Given the much higher increase in net total wealth inequality, the proportionate factor
contribution actually drops (from 0.72 to 0.60).
Stock holdings, on the other hand, represent the factor with the biggest growth
in importance and they exhibit changes in inequality consistent with those of net
wealth. By 1998, wealth in equity holdings accounts for more than 25 percent of net
total wealth inequality, compared to just 7 percent a decade before.23 Directly and
indirectly held equity plays the dominant role in the increase of overall net wealth
inequality by 1998, based on the percentage change in source contributions. Between
1998 and 2001, reduction in inequality of equity holdings (attributable mainly to the
significant reduction in inequality among equity holders but also to the higher
percentage of owners) more than outweighs the increase in their relative correlation
and share, contributing to a fall in net total wealth inequality. However, their
proportionate contribution to net wealth inequality remains at 25%. One may wonder
whether these conclusions on the importance of stockholding depend on using HSCV,
which is sensitive to the upper tail of the distribution. The next subsection examines
robustness with respect to using the Gini index.
20
4.2.
Decomposition of the Gini Index by Source
Despite the fact that the Gini coefficient focuses on the middle of the
distribution and records increased inequality throughout the period under study, Gini
decompositions reinforce the conclusions based on HSCV. The commonly used
Lerman and Yitzhaki (1985) decomposition of the Gini index expresses the absolute
contribution of wealth factor f to overall inequality as:
S f = G f f R fW
(8)
where G f is the inequality of factor f measured by Gini, f is the share of factor f in

net total wealth, and R fW is the rank correlation ratio defined as the ratio of the
covariance of households amount of wealth factor f with its ranking in the cumulative
distribution of net total wealth, over the covariance of its amount of wealth factor f
with its ranking in the cumulative distribution of factor f.
Table 8 reports decompositions of inequality of net total wealth as
summarized by the Gini coefficient. Equity holdings display one of the highest rank
correlation ratios, which gets higher over time, highlighting the growing importance
of risky financial assets for households position in the overall net wealth distribution.
In the period 1989-98, only stock holdings exhibit an increase in absolute and
proportionate contributions to net wealth inequality. The main factor behind this
increased contribution is the rise in its share of net total wealth over this period.24
5. Concluding Remarks
In the past two decades, household participation in stockholding grew

dramatically in the face of a stock market upswing and subsequent downswing. In this
paper, we have employed high-quality household-level data from the Survey of
Consumer Finances to shed light on the important links between stockholding,
21
household characteristics, financial attitudes and practices, and net wealth inequality.
Counterfactual distributions of equity holdings, separating changes in the
influence of investor characteristics from changes in the distribution of characteristics
within the stockholder pool, imply that the booming stock market of the 1990s raised
the share of smaller stockholders, while the subsequent downturn are estimated to
have improved the tendency of the stockholder pool to exhibit large equity wealth. In
this sense, the US experience between 1989 and 2001 seems consistent with a
dilution effect arising from the stock market boom, followed by a cleansing effect
of the stock market downturn.
Results from two different approaches, based on counterfactual distributions
and on two-stage probits using responses on cumulative gains and losses from
stockholding, support the view that heterogeneity in household characteristics, as well
as financial attitudes and practices, matter for stockholding levels and outcomes.
Being given the incentives to invest in stocks - for retirement or for other purposes
does not guarantee wealth generation, but presents a challenge to avoid investment
mistakes due to misguided attitudes and erroneous practices when handling risky and
information intensive investments. This is even true of mutual fund investments, even
though the latter are often thought of as straightforward.
We found inequality in equity holdings to be quite important for inequality in
overall net wealth, despite their limited share in net wealth. Reduced wealth inequality
is far from being an automatic outcome of the spread of stockholding opportunities. In
the absence of measures promoting financial education, transparency, and sound
portfolio practices, a shift of responsibility from Social Security to households could
well lead to a worsening of the distribution of wealth in the future, by challenging
disproportionately the small and less sophisticated investors.
22
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25
Appendix A: Simulated Average Marginal Effects
Standard econometric packages automatically report marginal effects for each

variable evaluated at mean remaining characteristics. Although it is standard practice
to report such automatically generated marginal effects, this is often not economically
relevant and sometimes even misleading. For example, it fails to distinguish among
single dummy variables and groups of dummy variables that represent a given
attribute; or properly evaluate effects of continuous variables entering with particular
nonlinear forms.25. Deriving averages of marginal effects that have been first
evaluated at each single observation can provide instead a more realistic and
economically relevant interpretation.
In this paper, we compute reported marginal effects in the following way. We start by
estimating the relevant limited dependent variable model. We then simulate the model
parameters (including for probit models with selection) by making 1000
independent draws from the multivariate normal distribution, subject to the
restrictions that the average of simulated values be equal to the respective estimated
parameter and that the structure of the estimated robust variance covariance matrix be
preserved. For each such set of simulated parameters, we calculate marginal effects
for each individual household and then derive the weighted average marginal effect
for the relevant population. We repeat the process for every set of simulated
parameters, thus computing a series of average marginal effects. The mean of this
series is the estimated marginal effect and the standard error is the simulated standard
error of the marginal effect.
In the cases of probit model with selection we compute conditional marginal effects,
using the formulae described in Greene (2000, p.857 & 860) and calculating the
average marginal effects over the selected sample.
Finally it should be noted that SCF data have been constructed on the basis of
repeated imputation, to eliminate missing values. Five different sets of imputed data
are provided. We take into account this feature, by first applying the above procedure
to each of the five implicates and then deriving marginal effects and standard errors
that are corrected for multiple imputation according to Rubin (1987).
Appendix B: The Machado-Mata Algorithm
The algorithm for constructing counterfactual distributions is a variant of Machado

and Mata (2005), recently used by Albrecht et al. (2003) and Nguyen et al. (2007):
1. Draw m random numbers from a uniform distribution on (0, 1): 1 , 2 ,...... m ;
here we set m=2000.
2. For each i where i = 1,2,,m, use the 1998 data on stockholders to estimate
the Quantile Regression coefficient, b98 (i ) , from the model:
Q98i [ y | X 98 ] = X 98 98 (i )
26
3. Make m random draws of characteristics and corresponding weights with

replacement from the 1989 stockholder pool. Denote the outcomes of these draws
by xi*89 for i = 1,2,.,m.
4. Generate counterfactual values (a random sample of size m from the desired
distribution): yi* = xi*89b98 (i ) , for i = 1,2,.,m. Use these values to generate
f * ( y; X 89b98 ) .
Then, for each of the three sequences of variables (log equity holdings in 1989 and
1998 and counterfactual values), we calculate percentiles using population weights.
The difference between percentiles of the distributions of the endogenous variable in
1998 and 1989 can be decomposed into:
f ( y 98 ) f ( y 89 ) = { f ( y 98 ) f * ( y; X 89b98 )} + { f * ( y; X 89b98 ) f ( y 89 )}
The term in the first curly brackets represents the contribution of the covariates to the
overall difference between the 1998 and 1989 distributions, evaluated at each
percentile. The term in the second curly brackets shows the contribution of the QR
coefficients. The method is a generalization of Oaxaca (1973) to the whole
distribution.
We further decompose the covariate effects into the contribution made by household
characteristics that can be seen as fundamentals and a remaining contribution that is
due to particular attitudes and practices. We assess the contribution of three attitudes,
namely financial alertness, willingness to take more than average risk, and intension
to leave a bequest. To this end we use the following sequential decomposition:
89 98
f ( y 98 ) f ( y89 ) = { f ( y 98 ) f ** ( y; X 98
f , X a , b )}
89 98
*
89 98
+ { f ** ( y; X 98
f , X a , b ) f ( y; X b )}
+ { f * ( y; X 89b98 ) f ( y89 )}
where the counterfactual f ** represents the equity wealth distribution that would have
prevailed in 1998 if the particular attitudes had been distributed as in 1989. The term
in the first curly bracket shows the relative contribution of attitudes, while in the
second the relative contribution of fundamentals.
In order to construct the counterfactual f ** we first divide each of the samples of
equity owners in 1989 and 1998 into 8 cells representing all the possible combinations
of the three attitudes. We follow steps 1 and 2 from above while in step 3 we make m
random draws with replacement from 1998 sample, generating the 1998 equity wealth
distribution implied by the model. Then we consider the subset of households in cell
1. We randomly draw with replacement observations from this subset to generate a
relative sample size equal to the fraction of households in cell 1 in 1989. We repeat
the last two steps for cells 2 to 8. A similar approach is followed for the period 19982001.
27
Appendix C: Data Appendix

US SCF data regard cross sections of households and are collected on a triennial basis
since 1983. High quality and highly comparable data are available since 1989. They
offer disaggregated information on a range of assets and liabilities as well as details
on households various financial attitudes and practices. An additional reason that
makes them appropriate for the purposes of this paper is that the survey over-samples
rich households, offering reliable information for the top of the wealth distribution.
This is important given that the main bulk of stockholding is concentrated among the
rich, the top 10 percent of households posses 2/3 of total household wealth, and the
main developments in the US wealth distribution over the last years have taken place
in its upper part. To make our figures representative for the whole US population we
adjust all our measures using survey weights. The survey uses a multiple imputation
procedure to impute missing values and we take this into account in our statistical and
regression analysis.
I. Asset Categories for Financial Wealth
Directly held stocks: [1]
[1] publicly traded stocks
Indirectly held equity: [2] + [3] + [4] + [5]
[2] stock mutual funds (full value if described as stock mutual fund,
1/2 value of combination mutual funds)
[3] IRAs/Keoghs invested in stock (full value if mostly invested in stock,
1/2 value if split between stocks/bonds or stocks/money market,
1/3 value if split between stocks/bonds/money market).
[4] Other managed assets w/equity interest: annuities, trusts, MIAs (full value if
mostly invested in stock, 1/2 value if split between stocks/MFs & bonds/CDs,
or "mixed/diversified", 1/3 value if "other")
[5] thrift-type retirement accounts invested in stock (full value if mostly invested in
stock, 1/2 value if split between stocks and interest earning assets).
Safe Assets: Total Financial Assets Directly held stocks Indirectly held equity
II. Asset and Debt Categories for Net Total Wealth (Tables 2&3)
Risky Financial Assets: Directly held stocks + Indirectly held equity
Safe Financial Assets: Total Financial Risky Financial
Net Wealth in Risky Real Assets & Business Equity: [1] + [2] + [3] [4] [5]
[1] Other Residential Real Estate (includes land contracts/notes household has made,
properties - other than the principal residence - classified under certain codes for
family residences, time shares and vacations homes)
[2] Gross equity in Non-residential Real Estate (real estate - other than the principal
residence, properties classified under certain codes for family residences, time shares,
and vacation homes)
[3] Business Equity (for businesses where the HH has an active interest, value is net
equity if business were sold today, plus loans from HH to business, minus loans from
28
business to HH not previously reported, plus value of personal assets used as

collateral for business loans that were reported earlier; for businesses where the HH
does not have an active interest, market value of the interest)
[4] Debt for Other Residential Property (includes land contracts, residential property
other than the principal residence, misc. vacation, and installment debt reported for
cottage/vacation home)
[5] Debt for non-residential real estate mortgages and other loans taken out for
investment real estate
Other Wealth: value of vehicles + other non-financial miscellaneous assets
Wealth in Primary Residence: Gross value of primary residence
Principal Residence Debt: [6]

[6] Principal Residence Debt (mortgage, home equity loans and HELOCs --mopup
LOCs divided between HE and other)
Consumer Debt: [7]+[8]+[9]+[10]
[7] Other lines of credit
[8] Credit Card Debt
[9] Installment loans
[10] Other Debt (loans against pensions, loans against life insurance, margin loans,
miscellaneous)
Note: All monetary values have been deflated using the CPI-U-Research Series index
and expressed into constant 2004 prices.
III. Variable Definitions
No high school diploma (omitted variable): Highest grade completed (X5901)<12 &
No high school diploma or passed equivalent test (X5902=5)
High school graduate: Highest grade completed (X5901)<12 & Has got high school
diploma (X5902=1) or passed equivalent test (X5902=2) OR Highest grade
completed (X5901)=12 OR Highest grade completed (X5901)>12 & No college
degree (X5904=5)
College graduate: Highest grade completed (X5901)>12 & Has got a college degree
(X5904)=1
Save for rainy days: The survey question is Now I'd like to ask a few questions
about your (family's) savings. People have different reasons for saving. What are
your (family's) most important reasons for saving? The dummy refers to those
reporting one of the following reasons: Emergencies; rainy days; other unexpected
needs; for "security"/independence (X3006=25 or X3007=25).
Financial alertness: The survey question is When making major decisions about
borrowing and saving, some people shop around for the very best terms while others
don't. What number would you be on the scale? The 10-number scale ranges from 1almost no shopping to 10-a great deal of shopping. Since 1995 the above question
has been replaced by two separate ones one for borrowing and one for saving with
29
responses coded on a 1 to 5 scale. We have standardized these measures by averaging

the two questions asked in post 1995 surveys and express them in 1-10 scale. The
dummy represents those declaring that they do a great deal of shopping (values 9, 10
in the scale).
Credit constrained: Indicates household response that it has been turned down for
credit in the past five years or did not receive amount originally requested or did not
apply for credit because it thought it might be turned down.
Willingness to take above average financial risk: The survey question is Which of
the following statements comes closest to the amount of financial risk that you and
your (spouse/partner) are willing to take when you save or make investments?
1. take substantial financial risks expecting to earn substantial returns
2. take above average financial risks expecting to earn above average returns
3. take average financial risks expecting to earn average returns
4. not willing to take any financial risks
The dummy represents those answering 1 or 2. (X3014=1 or X3014=2).
Health poor: The survey question is Would you say your health is excellent, good,
fair, or poor? Those describing their health as being poor are represented by the
dummy (X6030=4).
non equity net total Wealth: Total Assets (Directly held stocks + Indirectly held
equity) Other lines of credit - Credit Card Debt - Installment loans - Other Debt
(loans against pensions, loans against life insurance, margin loans, miscellaneous)
Income: income from wages, salaries, professional practice or business
unemployment compensation, social security, annuity, or other pensions.
Intension to leave a bequest: Yes to Do you expect to leave a sizable estate to
others? (X5825=1).
Has received inheritance: Yes to Have you ever received an inheritance, or been
given substantial assets in a trust or in some other form? (X5801=1).
Cumulative gains/losses in direct holdings of stocks: The survey asks stock holders
if there is a gain or loss in the value of the currently held stocks since they obtained
them (X3916). The same information is available for mutual fund holders (X3831)
Number of stocks held: The survey asks stock holders in how many different
companies they own stocks (X3914) and mutual fund holders in how many mutual
funds they own shares (X3820)
Investment Horizon>10 years: The dummy represents those declaring that a period
longer than 10 years is important when making their familys saving and spending
plan (X3008)
Access to professional advice: How do you make decisions about savings and
investments? (X7112-X7121 & X6865-X6869) The dummy comprises those asking
advice from at least one of the following: accountant, banker, broker, financial
planner
30
Appendix D: Formulae for inequality indices

Mean logarithmic deviation (MLD) of variable y with mean and n observations is
defined as:
1 n
MLD GE (0) = log

n i =1
yi
The Theil index is given by
Theil GE (1) =
y
1 n yi
log i
n i =1
Half of the square of the coefficient of variation (HSCV) is given by

HSCV GE (2) =
1
2n 2
( yi )yi =
i =1
var( y )
2 2
It can be shown that the more positive a is, the more sensitive GE(a) is to inequality at
the top of the distribution.
The Gini coefficient, is of the form:
Gini =
(i
n
2
i =1
where yis are in ascending order
31
n +1
) yi
2
Table 1: Probit Regressions for Ownership of Equity Holdings

1989
Age
Male
Married
Has children
White
Health poor
High school graduate
College graduate
Save for rainy days
Credit constrained
Non-investment Income
Non-equity net total
Wealth
Intension to leave a bequest
Has received inheritance
Financial alertness
Willingness to take above
average financial risk
Investment horizon > 10yrs
observations
log likelihood
Marginal
Effect
0.0031 ***
0.0097
0.0720 ***
-0.0395 **
0.1244 ***
-0.1287 ***
0.1556 ***
0.2867 ***
-0.0050
-0.0407 *
0.0076 ***
1998
tvalue
4.62
0.33
2.81
-2.23
5.89
-4.06
6.86
11.27
-0.32
-1.68
5.99
0.0116 *** 7.11

0.0784 *** 4.65
0.0292 *
1.77
-0.0197
-1.20
0.0809 ***
0.0481 **
3.89
2.44
3,143
-1530.8
2001
Marginal
tEffect
value
0.0027 *** 4.60
0.0041
0.17
0.0985 *** 4.25
-0.0255 *
-1.69
0.1412 *** 7.73
-0.0796 **
-2.25
0.1918 *** 8.03
0.3437 *** 13.11
-0.0026
-0.18
-0.0086
-0.49
0.0086 *** 6.92
0.0088 ***
0.1144 ***
0.0697 ***
0.0239
7.54
7.84
4.17
1.21
0.1871 *** 11.75

0.1076 *** 4.96
4,305
-1982.8
Marginal
tEffect
value
0.0006
0.91
0.0346
1.41
0.0645 *** 3.15
-0.0086
-0.57
0.1166 *** 6.47
-0.1849 *** -5.55
0.1969 *** 8.25
0.3638 *** 14.05
-0.0049
-0.32
-0.0476 **
-2.44
0.0071 *** 7.00
0.0087 ***
0.1128 ***
0.0489 ***
0.0177
7.68
7.98
2.64
1.06
0.1701 *** 10.34

0.0486 *** 2.65
4,442
-1970.2
Data from Surveys of Consumer Finances. The specification accounts for age through a 2nd order
polynomial, and for labor status. It controls for income, and non equity net total wealth using the
inverse hyperbolic sine transformation: log(x+(x2+1)1/2). Marginal effects are averaged across
households (using survey weights). The marginal effects for income and non equity net total wealth
are based on a $5000 increase in the underlying variables and for age on a one year increase.
Numbers in italics report t-values, derived from simulated standard errors (details can be found in
appendix A). ***,** and * denote significance at 1%, 5% and 10% level, respectively. Reported
estimates are corrected for multiple imputation.
32
Table 2: Educational Attainment, Income and net Wealth in the Population and
among Equity Owners
1989
Population
Education (%)
Less than high school education
High school graduates
College degree or more
Mean (Median) non-investment Income
Mean (Median) non-equity Net total Wealth
Equity Owners (%)

Equity Owners
Education (%)
Less than high school education
High school graduates
College degree or more
Mean (Median) non-investment Income
Mean (Median) non-equity net total Wealth
1998
2001
23.3
48.8
27.9
51,203
(35,168)
249,749
(66,469)
15.4
51.4
33.2
56,538
(37,245)
244,506
(68,579)
15.2
50.9
33.9
64,102
(38,691)
308,318
(76,679)
31.8
48.9
51.9
7.3
45.5
47.2
87,145
(61,161)
513,993
(181,918)
5.4
47.8
46.8
82,825
(58,783)
390,595
(127,400)
4.7
45.7
49.6
93,731
(61,091)
486,494
(154,720)
Weighted data from Surveys of Consumer Finances. The reported statistics are corrected for
multiple imputation. The sample of equity owners includes households who own directly or
indirectly stocks. Money values refer to 2004 Dollars.
33
Table 3: Incidence of Cumulative Gains or Losses in Stockholding since Purchased,

by Education Group (%)
All
Holders
Holders by Educational Attainment

Less than
High School
Education
High School
Graduates
College Degree
or More
1998
Direct Stockholding
Cumulative Gains
No Gains or Losses
Cumulative Losses
79.2
8.4
12.4
73.3
15.3
11.5
78.1
9.6
12.3
80.4
7.0
12.6
Mutual Funds
Cumulative Gains
No Gains or Losses
Cumulative Losses
85.8
8.0
6.2
66.7
21.2
12.2
84.3
8.0
7.8
87.7
7.3
4.9
2001
Direct Stockholding
Cumulative Gains
No Gains or Losses
Cumulative Losses
52.4
12.3
35.3
43.0
15.8
41.2
48.5
13.4
38.1
55.5
11.3
33.2
Mutual Funds
Cumulative Gains
No Gains or Losses
Cumulative Losses
53.2
11.5
35.4
27.8
20.1
52.1
49.1
13.8
37.1
56.5
9.7
33.7
Weighted data from Surveys of Consumer Finances. The reported statistics are
corrected for multiple imputation.
34
Table 4: Determinants of Cumulative Gains or Losses in Direct Holdings of Stocks,

since Purchased
1998
Pr(Gains)
Marginal
Effect
-0.0004
-0.0805 **
0.0826 **
-0.0171
0.0678
0.1206 **
0.0571
0.1176
-0.0155
-0.0001
2001
Pr(Losses)
tMarginal
value Effect
-0.31 -0.0005
0.0460
-1.98
2.15 -0.0728 **
-0.65 -0.0022
1.39 -0.0036
2.10 -0.0812 *
0.64 -0.0325
1.33 -0.0361
0.0143
-0.37
0.0009
-0.04
Age
Male
Married
Has children
White
Health Poor
College graduate
Credit constrained
Wealth
0.0006
1.00 -0.0004
Has received inheritance 0.0476 ** 2.08 -0.0294
Financial alertness
0.0654 ** 2.57 -0.0221
-0.0296
0.0291
-1.31
0.0120
0.45 -0.0304
Use of professional advice
0.0336
1.34 -0.0279
Number of Stocks held
0.0018 ** 2.26 -0.0012 *
observations / uncensored obs.

log likelihood
-.11
4,305 / 1,390
-603.9
tvalue
Pr(Gains)
Pr(Losses)
-0.52
1.46
-2.25
-0.11
-0.09
-1.72
-0.41
-0.46
0.40
0.90
Marginal
tMarginal
Effect
value
Effect
0.0043 ***
-0.0022
3.39
*
0.0189
0.32 -0.0254
-0.0069
-0.15 0.0022
0.0370
1.21 -0.0365
1.67 -0.0697
0.0839*
-0.59 0.0252
-0.0622
1.17 -0.0129
0.0914
1.96 -0.0688
0.1463**
-0.73 0.0639
-0.0412
1.42 -0.0021 *
0.0015
-0.77
-1.46
-0.91
0.0013
0.0922***
-0.0083
1.36
3.49
-0.26
-0.0003
-0.0777 ***
-0.0222
-0.30
-3.08
-0.68
1.44
-1.49
-1.34
-1.78
0.0428*
0.0567*
-0.0470
0.0016**
1.66
1.93
-1.63
2.29
-0.0043
-0.0588 **
0.0189
-0.0015 **
-0.16
-2.12
0.68
-2.16
.004
4,305 / 1,390
-449.6
-.32
4,442 / 1,515
-970.8
tvalue
-1.82
-0.45
0.05
-1.28
-1.39
0.25
-0.16
-0.86
1.15
-1.86
.37*
4,442 / 1,515
-2975.7
Data from Surveys of Consumer Finances. Second-stage probit regressions, correcting for selectivity bias
among owners of directly held stocks (each is estimated from a two stage probit model and when it is
insignificant the estimation is reduced to a probit regression over the uncensored observations). The
specification accounts for age through a 2nd order polynomial, and for labor status. It controls for income, and
non equity net total wealth using the inverse hyperbolic sine transformation: log(x+(x2+1)1/2). Conditional
marginal effects are averaged across households who directly own stocks (using survey weights). The marginal
effects for income and non equity net total wealth are based on a $5000 increase in the underlying variables and
for age on a one year increase. Numbers in italics report t-values, derived from simulated standard errors
(details can be found in appendix A). ***,** and * denote significance at 1%, 5% and 10% level, respectively.
Reported estimates are corrected for multiple imputation.
35
Table 5: Determinants of Cumulative Gains or Losses in Stockholding through Mutual Funds,

since Purchased
1998
Pr(Gains)
Age
Male
Married
Has children
White
Health Poor
College graduate
Credit constrained
Wealth
Has received inheritance
Financial alertness
Use of professional advice
Number of shares in
different mutual funds
observations / uncensored obs.

log likelihood
Marginal
Effect
0.0009
0.0290
-0.0258
-0.0040
0.0425
0.0492
0.1429
0.1418
-0.0050
0.0008
0.0000
0.0339
0.0249
2001
Pr(Losses)
tMarginal
tvalue Effect
value
0.74 -0.0018 *
-1.89
0.64 -0.0347
-0.95
-0.74 0.0224
0.97
*
-0.15 -0.0302
-1.75
0.92 0.0072
0.23
0.68
1.46 0.0088
0.15
1.46 0.0022
0.04
-0.11 -0.0329
-1.26
0.58 -0.0012
-1.07
-0.02
1.40
0.94
Pr(Losses)
Marginal
tEffect
value
0.0048 ***
3.22
0.1559 **
2.46
-0.0588
-1.10
0.0454
1.36
0.2332 ***
4.03
0.1838
1.56
*
0.1699
1.68
0.2779 ***
2.81
-0.0170
-0.24
0.0003
0.23
Marginal
tEffect
value
-0.0030 ** -2.05
-0.1662 ** -2.50
0.0938 *
1.84
-0.0406
-1.26
-0.1334 ** -2.23
-0.0549
-0.47
-0.1680
-1.56
-0.2262 ** -2.15
0.0161
0.24
-0.0016
-1.43
0.0011 ** 2.42
0.0011
0.06
-0.0108
-0.55
0.0003
-0.0065
0.0334
0.58
-0.23
0.98
-0.0004
-0.0195
-0.0707 **
-0.90
-0.68
-2.19
0.0487 *
0.0670 **
-0.0343
1.65
2.20
-1.08
-0.0408
-0.0744 **
0.0121
-1.36
-2.50
0.40
0.0532 **
0.0251
0.0366
2.38
1.02
1.40
-0.0260 *
-0.0044
-0.0107
0.0053 *
1.65
-0.0066 ** -2.45
-.92
4,305 / 1,086
-395.6
Pr(Gains)
-1.76
-0.26
-0.60
.47
4,305 / 1,086
-226.3
0.0119 ***
.01
4,442 / 1,155
-732.7
3.56
-0.0117 *** -3.30

.19
4,442 / 1,155
-687.4
Data from Surveys of Consumer Finances. Second-stage probit regressions, correcting for selectivity bias
among owners of mutual funds (each is estimated from a two stage probit model and when it is
insignificant the estimation is reduced to a probit regression over the uncensored observations). The
specification accounts for age through a 2nd order polynomial, and for labor status. It controls for income, and
non equity net total wealth using the inverse hyperbolic sine transformation: log(x+(x2+1)1/2). Conditional
marginal effects are averaged across households who own mutual funds (using survey weights). The marginal
effects for income and non equity net total wealth are based on a $5000 increase in the underlying variables
and for age on a one year increase. Numbers in italics report t-values, derived from simulated standard errors
(details can be found in appendix A). ***,** and * denote significance at 1%, 5% and 10% level,
respectively. Reported estimates are corrected for multiple imputation.
36
Table 6: Net Wealth Inequality Indices

Generalized Entropy Class
Year
GE(0)
GE(1)
GE(2)
Gini
MLD
Theil
HSCV
1989
2.022
1.523
14.037
0.769
1998
1.860
1.646
19.156
0.776
2001
1.966
1.622
12.847
0.788
Weighted data from Surveys of Consumer Finances. The reported statistics are corrected for multiple
imputation. The sample excludes households with negative net worth.
37
Table 7: Net Wealth Inequality Decomposition by Sources using HSCV

Wealth in Wealth in
Safe
Equity
Financial Holdings
Assets
Year
Net
Total
Wealth
1989
Percentage
with positive 1998
2001
factor wealth
0.957
0.973
0.971
0.907
0.936
0.937
0.339
0.512
0.537
Net Wealth in
Risky Real
Assets &
Bus. Equity
0.289
0.271
0.259
Other
Wealth
Wealth in Principal
Consumer
Primary Residence
Debts
Residence Debt
0.857
0.850
0.870
0.681
0.703
0.714
0.418
0.454
0.468
0.615
0.607
0.616
(nf+ )
Factor
Share
()
Correlation
with net
total wealth
(fW)
Factor
Inequalities
(I)
1989
1998
2001
1989
1998
2001
1.000
1.000
1.000
1.000
1.000
1.000
0.251
0.219
0.212
0.542
0.559
0.639
0.100
0.254
0.268
0.446
0.647
0.682
0.353
0.296
0.287
0.905
0.863
0.825
0.061
0.054
0.048
0.267
0.358
0.370
0.356
0.320
0.307
0.401
0.401
0.507
-0.093
-0.115
-0.102
-0.174
-0.160
-0.183
-0.029
-0.029
-0.022
-0.264
-0.358
-0.203
1989
1998
2001
Within Factor 1989
1998
Inequality
+
2001
(If )
14.037
19.156
12.847
13.409
18.628
12.462
16.831
14.592
18.211
15.226
13.631
17.036
37.110
46.750
24.825
12.257
23.695
13.106
72.197
108.032
63.960
20.257
28.881
16.178
31.696
7.909
8.038
27.318
6.649
6.932
1.362
1.376
1.561
0.767
0.819
0.971
2.351
1.696
1.836
0.692
0.498
0.592
11.891
26.424
22.817
7.126
15.851
13.857
Proportionate
Factors
contributions
(s)
Absolute
Factors
contributions
(S)
Percentage
change in
source
contributions
(s%S)
1989
1998
2001
1.000
1.000
1.000
0.149
0.107
0.162
0.073
0.258
0.254
0.722
0.606
0.529
0.025
0.012
0.014
0.045
0.034
0.054
-0.007
-0.005
-0.007
-0.007
-0.012
-0.006
1989
1998
2001
14.037
19.156
12.847
2.082
2.045
2.074
1.013
4.918
3.262
10.163
11.634
6.797
0.346
0.237
0.182
0.622
0.657
0.698
-0.093
-0.104
-0.090
-0.098
-0.230
-0.076
19981989
0.365
-0.003
0.280
0.105
-0.008
0.003
-0.001
-0.009
-0.318
0.002
-0.087
-0.252
-0.003
0.002
0.001
0.008
20011998
38
Table 8: Net Wealth Inequality Decomposition by Sources using Gini
Year
Wealth in
Net
Safe
Total
Financial
Wealth
Assets
Net Wealth in
Wealth in
Other
Risky Real
Equity
Wealth
Assets &
Holdings
Bus. Equity
Wealth in
Primary
Residence
Principal
Consumer
Residence
Debts
Debt
Factor
Share
()
Rank
correlation
ratio
1989
1998
2001
1989
1998
2001
1.000
1.000
1.000
1.000
1.000
1.000
0.251
0.219
0.212
0.913
0.902
0.914
0.100
0.254
0.268
0.909
0.932
0.939
0.353
0.296
0.287
0.942
0.945
0.948
0.061
0.054
0.048
0.729
0.654
0.692
0.356
0.320
0.307
0.821
0.812
0.841
-0.093
-0.115
-0.102
0.445
0.443
0.473
-0.029
-0.029
-0.022
0.385
0.329
0.299
Gini Index
(Gf)
1989
1998
2001
1989
1998
2001
0.769
0.776
0.788
1.000
1.000
1.000
0.823
0.809
0.831
0.245
0.206
0.205
0.939
0.908
0.898
0.111
0.277
0.287
0.957
0.955
0.955
0.414
0.345
0.330
0.664
0.618
0.601
0.039
0.028
0.026
0.645
0.605
0.624
0.245
0.202
0.205
0.795
0.749
0.750
-0.043
-0.049
-0.046
0.784
0.794
0.776
-0.011
-0.010
-0.006
1989
1998
2001
0.769
0.776
0.788
0.189
0.160
0.161
0.085
0.215
0.226
0.318
0.267
0.260
0.030
0.022
0.020
0.189
0.157
0.162
-0.033
-0.038
-0.036
-0.009
-0.007
-0.005
(RfW)
Proportionate
Factors
contributions
(s)
Absolute
Factors
contributions
(S)
39
Difference in log Equity

-2 -1.5 -1 -.5 0 .5 1 1.5
Figure 1A. Quantile Regression Decomposition 1998-1989:

Coefficient and Covariate effects
20
40
60
80
100
Percentile
coefficient effects
actual difference
covariate effects
-2
-1.5

-1 -.5
0
.5
1
1.5
Figure 1B. Quantile Regression Decomposition 1998-1989:Contributions of

Fundamentals to Covariate effects
20
40
60
80
Percentile
fundamentals as in 1989
40
covariate effects
100
-1.5

-1
-.5
0
.5
1
1.5
Figure 2A. Quantile Regression Decomposition 2001-1998:

Coefficient and Covariate effects
20
40
60
80
100
Percentile
coefficient effets
actual difference
covariate effets
-1.5
-1

-.5
0
.5
1
1.5
Figure 2B: Quantile Regression Decomposition 2001-1998:

Contributions of Fundamentals to Covariate effects
20
40
60
80
Percentile
fundamentals as in 2001
41
covariate effets
100
Endnotes
1
For participation trends in the United States since the 1980s, see Bertaut and Starr-McCluer (2001).
International comparisons can be found in the volume edited by Guiso, Haliassos, and Jappelli (2001).
2
Limited stockholding participation in the early to mid 1980s was documented in US data by King and
Leape (1984), Mankiw and Zeldes (1991), and Haliassos and Bertaut (1995). A number of authors have
recently explored determinants of participation in stockholding. See, for example, Haliassos and
Bertaut (1995), Cocco, Gomes and Maenhout (2005), Heaton and Lucas (2000), Gollier (2001),
Campbell and Viceira (2002), Haliassos and Michaelides (2003), and Gomes and Michaelides (2004).
3
Hurst and Lusardi (2004) have recently documented that a positive relationship between wealth and
entry into entrepreneurship can be found only at the top five percentiles of the wealth distribution.
Carroll (2001) showed that the portfolio behavior of rich households is quite different from that of
households lower in the distribution of wealth, and richer households are not simply blown-up versions
of poorer households. Wolff (1998) shows that only the top 20 percent of households enjoys higher
mean net worth and financial wealth levels between 1983 and 1995, while the other groups undergo
real wealth or income losses with the shortfall being more severe for the poor.
4
For effects of stock market participation regarding market volatility and stock market trading, see
Pagano (1989), Allen and Gale (1994), Herrera (2001), and Bilias, Georgarakos, and Haliassos (2007).
For effects on the equity premium, see for example Heaton and Lucas (1999) and Calvet et al. (2004).
5
In this paper, we try to avoid some pitfalls involved in automatic computation of marginal effects by
standard econometric software, which have recently been emphasized. We explain how we overcome
these problems in Appendix A.
6
Regressors are the same as for the participation probits, presented in Table 1.
7
Coefficient and covariate effects deviate across higher percentiles, and both are significant in most
percentiles, according to bootstrapped standard errors not reported here.
8
The current analysis, based on different cross sections, cannot directly reveal whether significant
entries and exits took place during that time. Using panel data for the same period, Bilias, Georgarakos,
and Haliassos (2007) confirm such a conjecture by showing that a non-trivial number of US households
(over 20%) have changed stock ownership status.
9
Another approach would be to construct realized stockholding returns by household and then compare
them to some stock market index over the relevant period. Whatever the merits of such an approach, it
cannot be implemented in population-wide survey data, because realized rates of return over specific
periods cannot be computed.
10
We have also experimented with specifications without the use of any exclusion restriction (where
the functional form contributes to the model identification) and the results are similar to those we
present.
11
The SCF reports also unrealized capital gains, but we do not use those to measure relative success, as
there is no information on the length of the holding period to which they correspond.
12
Under professionals, we include accountants, bankers, brokers, and financial planners. The
proportion of stockholders who report using professional advice in making decisions about savings and
investments is 59% in 1998 and drops slightly to 57% in 2001, following the stock market downturn.
13
They would be weakened by strong evidence that use of financial advice is actually due to the
absence of cumulative gains, suggesting endogeneity. We doubt that such factors are dominant here, as
the use of financial advisors is typically observed among households with limited knowledge of the
market or by financially successful households who do not have the time to monitor their own
portfolios.
14
In view of the tremendous upswing of the stock market in the 1990s and the downswing around the
end of the century, the earlier households have bought stocks, the more likely they are to report
cumulative gains. This can provide an important channel through which characteristics that correlate
with financial sophistication lead to cumulative gains, namely by inducing households to enter the
market earlier. Still, there is no reason to suppose that the influence of these characteristics is exhausted
in the timing of initial entry and that it does not extend to subsequent entries and exits and to other
aspects of portfolio behavior contributing to gains.
15
The measurement part of our analysis of wealth distribution is complementary to the careful work by
Kennickell (2003), which is based on the same set of SCF surveys. Kopczyk and Saez (2003) use estate
tax returns to study shares of wealth held by the very rich and they find, consistent with Kennickell,
that top wealth shares have not increased since 1995, and that the share of stock market wealth held by
the richest (relative to the total stock market wealth held by the whole population) fell in the past 20
years. They attribute the latter finding partly to increased stock market participation.
42
16
The presence of the rich is very important in studying the distribution of wealth since the richest 1%
of households possesses roughly the 1/3 of the total wealth. The Survey excludes only households that
belong to the Forbes 400. See also Kennickell (2003).
17
As Atkinson (1983) points out, [inequality indices] embody implicit judgments about the weight to
be attached to the inequality at different points in the [] scale. Details on the asset definitions and
the formulae for inequality indices are provided in Appendices C and D, respectively.
18
Inequality indices for gross total wealth over the full sample of households produce a similar picture.
19
See Jenkins (1995) for a similar argument in favor of using HSCV for analysis of income inequality.
20
Decompositions presented in tables 2 and 3 have been also applied to gross total wealth using the full
sample of households and excluding the two categories that represent debt. In all cases they suggest
similar patterns to those we present.
21
The result mainly comes from the increasing factor correlation, implying a stronger association
between housing value and total net wealth over time, which outweighs the decreasing factor shares.
Factor shares decrease presumably due to movements in housing prices, since ownership rates move in
the opposite direction.
22
This is because the dropping factor share and correlation with net total wealth moderate the effects
from the increase in this factors inequality.
23
Stock holdings exhibit a high increase in factor share, increased correlation with net total wealth, and
increased inequality (coming from the increase in within inequality that almost doubles, outweighing
the effect from the increase in the percentage of stock owners), all leading to a more than quadruple
increase in their absolute factor contribution between 1989 and 1998.
24
The higher risky shares result from increasing ownership rates and sizeable stock gains in a decade
marked by a spread of equity culture and a stock market boom.
25
There is growing discussion of these issues and an effort to provide codes that circumvent some
inefficiencies of standard software packages (see, for instance, King et al., 2003).
43

Equity Culture

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Yannis Bilias

Equity Culture and the Distribution

Equity Culture and the Distribution of Wealth#

2. Increased participation and the transformation of the stockholding pool

2.1. The Composition of the Stockholder Pool: Counterfactual Distributions

f ( y 2001 ) f ( y 98 ) = { f ( y 2001 ) f * ( y; X 2001b98 )} + { f * ( y; X 2001b98 ) f ( y 98 )}

2.2. A Role for Financial Attitudes and Practices?

f ( y 2001 ) f ( y 98 ) = { f ( y 2001 ) f * ( y; X 2001b98 )}

3. Who Gains and Who Loses in the Stock Market?

We now turn to examining directly the systematic role of household

and practices, to experiencing cumulative gains or losses in stockholding by 1998 and

stockholding, conditional on participation, in order to estimate the contributions of

Portfolio breadth has a positive and statistically significant contribution to the

Having received an inheritance or substantial assets in a trust or in some other

Given that household participation in stockholding is far from universal; and

4. How important is Stockholding for Net Wealth Inequality?

In this Section, we document changes in inequality of net total wealth among

4.1. How has Net Wealth Inequality Changed?

4.2. The Growth in Importance of Stockholding for Net Wealth Inequality

Appropriate decompositions of inequality indices allow us to investigate the

A factor component contributes to increased (reduced) inequality if S f > 0 (<0). The

Decomposition of HSCV by Source

This expresses the proportionate contribution of factor f in terms of factor correlation

(Jenkins, 1995). Hence, in our tables presenting wealth decompositions, we report

important role for factor f in raising total inequality over time.

Decomposition of the Gini Index by Source

where G f is the inequality of factor f measured by Gini, f is the share of factor f in

In the past two decades, household participation in stockholding grew

Decomposition by Factor Components,

Appendix A: Simulated Average Marginal Effects

Standard econometric packages automatically report marginal effects for each

The algorithm for constructing counterfactual distributions is a variant of Machado

3. Make m random draws of characteristics and corresponding weights with

Appendix C: Data Appendix

business to HH not previously reported, plus value of personal assets used as

Principal Residence Debt: [6]

responses coded on a 1 to 5 scale. We have standardized these measures by averaging

Appendix D: Formulae for inequality indices

MLD GE (0) = log

Half of the square of the coefficient of variation (HSCV) is given by

where yis are in ascending order

Table 1: Probit Regressions for Ownership of Equity Holdings

0.0116 *** 7.11

0.1871 *** 11.75

0.1701 *** 10.34

Equity Owners (%)

Table 3: Incidence of Cumulative Gains or Losses in Stockholding since Purchased,

Holders by Educational Attainment

Table 4: Determinants of Cumulative Gains or Losses in Direct Holdings of Stocks,

observations / uncensored obs.

Table 5: Determinants of Cumulative Gains or Losses in Stockholding through Mutual Funds,

observations / uncensored obs.

-0.0117 *** -3.30

Table 6: Net Wealth Inequality Indices

Table 7: Net Wealth Inequality Decomposition by Sources using HSCV

Table 8: Net Wealth Inequality Decomposition by Sources using Gini

Difference in log Equity

Figure 1A. Quantile Regression Decomposition 1998-1989:

Difference in log Equity

Figure 1B. Quantile Regression Decomposition 1998-1989:Contributions of

Difference in log Equity

Figure 2A. Quantile Regression Decomposition 2001-1998:

Difference in log Equity

Figure 2B: Quantile Regression Decomposition 2001-1998: