The Participation Reversal Puzzle

Risky-asset participation rose in the 1990s, then reversed after the mid-2000s despite continuing declines in financial technology costs. We explain this reversal by separating access costs from data costs. Lower access costs expand participation, but cheaper scalable data lets wealthy investors acquire more information, bid up prices, and reduce risk-adjusted returns for marginal, uninformed households.  Using SCF and Addepar portfolio data, we document the model’s crosssectional mechanisms: middle-wealth households exited, while informed investors earned higher returns and held riskier portfolios. Quantitatively, technological change accounts for 49% of the post-2007 participation reversal and explains the post-Covid rise.