FINA1109 Lecture Notes - Lecture 10: Long Division, Mutual Fund, Tax Refund

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16 May 2018
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Tuesday, 17 October 2017
LECTURE 10
PLANNING AND THE REALLY LONG TERM
-Objectives
How does making financial decisions change with others?
Consider the personal balance sheet implication of partners?
-Do we “sort”?
-Assets? Liabilities? Risk Tolerance?
What are the personal balance sheet implications of children?
-Costs? Assets? Liabilities?
What is the role of retirement saving for me?
-What is superannuation and how does it work?
-What type will you have: defined benefit/contribution plans
-What to do with multiple super accounts
-What super comes with - insurance
-Partners
We tend to live together
-Fewer married
-More likely to “cohabit” before marriage
We are getting older when we get married
We bring more financial history, “baggage”
-Taking on debt a bit later
Who do we partner with?
-“…homogamy among heterosexual couples: individuals mate with their likes because many
characteristics, such as education, consumption behaviour, desire to nurture children, religion, etc.
exhibit strong complementarities in the household production function”
-Theory of Positive Assortative Mating (Becker, 1973)
Matched by “socio-economic ability” index ranking
Marriage ‘market’
-Subset of characteristics that are important
-Can create an index, ranking
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Tuesday, 17 October 2017
-Effectively try to find someone of a different gender with the same rank
-We tend to find same ethnic, age, education partners
Strongest for:
-Married heterosexuals (particularly those with children)
Education correlation stronger for same-sex males and childless couples
Correlations between hours worked between partners is stronger for same-sex and unmarried
couples
Correlations between wage rates is stronger for partners in same-sex couples
How do partners make financial decisions?
-Do individuals within couples make decisions differently than when single?
Share decisions?
Whose preferences dominate? ex/ Risk tolerance?
-How do partners change personal balance sheets?
-We know that financial disagreements are a predictor of separation
There are financial costs in addition to personal costs
From empirical evidence we have suggestions to newly partnered/married
-Power discrepancies
Younger and wealthier are more powerful in a couple
-Some empirical results (of no direct relevance)
Couple’s decisions closer to male preference (unless female makes more money)
Males more likely chosen as household’s financial representative
Couples generally agree what decisions are being made by whom
-But both partners think they contribute more
Large financial decisions made jointly
Paying taxes and tracking investments
-More than half of men say they are primarily responsible
-Women report these more evenly distributed
So…
-Are partners an asset?
-Does PAM extend to risk and investment choices?
Attraction of “like” or “opposites”?
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Tuesday, 17 October 2017
On average…
-Single men tend to be risk tolerant & over confident
Barber and Odean (2001) found that men were more overconfident in their trading activity
-Men trade 45% more than women
-Trading reduces men’s net returns by 2.65% points p.a vs 1.72% points for women
-Single women tend to be more risk averse
Dwyer, Gilkeson, List (2002) find that
-“Women exhibit less risk-taking than men in their most recent, largest and riskiest mutual
fund investment decisions…
-(The) greater level of risk aversion among women that is frequently documented in the
literature can be substantially, but not completely, explained by knowledge disparities”
Creation of partnership may temper the more extreme behaviour of the two individuals
-The disparity is not clear and may indeed arise from differences in understanding of the
investment choices available to women
-Some tentative evidence (HILDA survey)
-The cost of bringing up a child
NATSEM’s 2013 estimate of the “cost” of raising a child often quoted:
-The cost of raisin children had increased more than 50% since 2007
-Up to $458 per week spent on raising one child
-The cost of raising two children to age 21 was estimated at ~$800,000
Really?
-Remember the difference between
Statement of financial performance (Profit & Loss)
Statement of financial position (Balance Sheet)
-Ex/ Spending more than you earn can show in liabilities going up or assets going down
-Wealth differences for families with children - HILDA
If it really “costs” that much when we look at families with children are their assets that
much less? Article suggests not
-Retirement savings
Why do we have superannuation?
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Document Summary

What type will you have: de ned bene t/contribution plans. What to do with multiple super accounts. Partners: we tend to live together. More likely to cohabit before marriage: we are getting older when we get married, we bring more nancial history, baggage . Homogamy among heterosexual couples: individuals mate with their likes because many characteristics, such as education, consumption behaviour, desire to nurture children, religion, etc. exhibit strong complementarities in the household production function . Theory of positive assortative mating (becker, 1973: matched by socio-economic ability index ranking, marriage market". Effectively try to nd someone of a different gender with the same rank. We tend to nd same ethnic, age, education partners: strongest for: We know that nancial disagreements are a predictor of separation: there are nancial costs in addition to personal costs, from empirical evidence we have suggestions to newly partnered/married. Power discrepancies: younger and wealthier are more powerful in a couple.

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