The Richmond Fed’s latest Economic Brief helps reconcile economic theory with empirical studies on how households invest their wealth.
The classical theory predicts that the share of household wealth invested in risky assets, such as stocks, should be independent of the level of wealth. In reality, however, wealthier households do invest a larger share of their wealth in risky assets. The Richmond Fed essay suggests a modification to the theoretical framework, explicitly treating the household as two individuals with potentially different levels of risk aversion and bargaining power. In this framework, the household does indeed invest a greater share in risky assets as its wealth increases.
The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.