What Drives the Heterogeneity in Portfolio Choice? The Role of Institutional, Traditional, and Behavioral Factors

We analyze stock market participation in 19 European countries over 2004-2013, jointly controlling for all relevant variables from prior literature. Previous work relies on a subset of these factors, and often lacks good risk aversion proxies. Our full model explains 30% of the variation in the participation decision. Institutional factors captured by country fixed effects contribute 9.5 percentage points; traditional individual-level factors, such as risk aversion and income, contribute 15 pp; recently identified factors, such as trust and health, contribute 5.5 pp. Most new factors offer little help explaining non-participation at the high end – among the wealthy and well-educated. We present evidence challenging and complementing existing interpretations of factors such as IQ, sociability, and trust. We suggest a hierarchical framework for thinking about effects in the high versus low end.