Foregone Consumption and Return-Chasing Investments

We show individuals investments chase stock index returns and are financed by foregoing consumption, even after controlling for individual-account level portfolio income effects and other high dimensional fixed effects. This effect only exists for positive stock index returns with no effects for negative returns and are driven by the most salient stock index rather than other stock indices that are more representative of total stock market returns. To finance the investment, the foregone consumption occurs in the week after stock index returns are realized and are more pronounced for luxuries than necessary goods, and durables versus non-durables and services. Contrary to predictions from rational models of investor behavior with financial constraints, wealthy and more liquid accounts exhibit a larger return-chasing investment and foregone consumption, more consistent with theories of extrapolative expectations and loss aversion.