WHY DO SO FEW HOLD STOCKS

We investigate why 75% of United States households do not hold stocks despite the equity premium and predictions of expected-utility models. The question is relevant for privatisation, asset pricing, and tax progressivity issues. We show that risk aversion Pcr se, heterogeneity of beliefs, habit persistence, time non-separability, and quantity constraints on borrowing do not account for the phenomenon. A wedge between borrowing and lending rates, and minimum-investment requirements are plausible but empirically weak factors. More promising explanations are inertia and departures from expected-utility maximisation. There is also qualified support for nondiversifiable income risk as a contributing factor.