What makes a household wealthy? Is it reckless risk-taking or careful planning?

Abstract

We aim to determine how different financial planning and risk-taking levels affect the US households’ wealth distribution positions. To this end, we use the Luxembourg Wealth Study data, which contains detailed information on individuals’ financial planning and risk-taking in the US. We divide the population of households into four quartile groups regarding their financial assets. Then, we estimate the effects of financial planning and risk-taking, alongside other variables, on the households’ probability to be in these groups utilizing an extended ordered probit model. The main advantage of this method is its ability to deal with ordinal endogenous covariates. After ensuring the robustness of our results regarding changes in data and the dependent variable, we conclude that careful planning is more critical than reckless risk-taking. We recommend family decision-makers plan as far ahead as possible to ensure their household’s financial success.

To replicate the results presented in the study, the published STATA code must be executed using LISSY, which is the remote-execution system of the Luxembourg Income Study (LIS) cross-national data center. https://www.lisdatacenter.org/data-access/lissy/

Authors:

Ivan Skliarov, MA; The University of Warsaw; i.skliarov@student.uw.edu.pl

Lukasz Goczek, PhD; The University of Warsaw; lgoczek@wne.uw.edu.pl