Financial models have shown time and again that it is beneficial for all households to invest in stocks, yet relatively few choose to do so. Until now the assumption has been that pecuniary participation costs turn people off investing. But recent research suggests there may be other deterrents at play.

Steffen Andersen and Kasper Meisner Nielsen looked at stock market participation following windfall wealth - specifically, inheritance following 10,344 sudden deaths in Denmark from 1998-2003. This enabled them to isolate the cost effects and show that, in fact, they are not the only factor or even the main one behind non-participation in the stock market.

"The leading explanation for non-participation has been fixed entry or ongoing participation costs of some kind - anything from transaction costs to time spent gathering information and preparing tax returns. Alternatively, fixed costs may be an economist's pecuniary representation of behavioral and psychological factors that make equity ownership uncomfortable for some households," they say.

"If fixed entry and participation costs restrict participation, we would have expected individuals to respond to windfall wealth from unexpected inheritance by entering the stock market. But we find even sizeable windfalls do not have a commensurate impact on participation, suggesting behavioral, cognitive and psychological explanations are at play."

The Danish legal and institutional environment made it possible for the authors to trace stock market participation following sudden death, as well as the level of inheritance and educational and other characteristics of the beneficiaries.

While inheritance of one million Danish kroner (1.5 million HKD) increased an individual's probability of entering the stock market within the following three years by 21 percentage points, that still left a vast majority of beneficiaries shying away. Such an inheritance also increased the probability that someone already in the stock market would remain there by only 0.4 percentage points.

Even when focusing on highly educated and financially literate individuals such as those with a university degree in economics, finance or a related discipline, there was only a seven percentage points higher probability they would enter the stock market upon inheriting one million kroner, although the sample size for this was small.

The authors also ruled out procrastination as a reason why people may not enter the stock market by looking at those who inherit stocks rather than cash, as this changes the active decision from deciding to invest in stocks to deciding not to hold stocks.

"Among households that inherit stock holdings, the majority of individuals actively exit the stock market by selling the entire position. This finding limits the viability of participation costs as the leading explanation for the participation puzzle," the authors say.

So where does the money go? Non-participants were found to keep a substantial portion of their inheritance in other financial assets, primarily cash, rather than equities.

Collectively, the results show that while fixed entry costs may account for one-third of non-participants, the majority of individuals did not use their windfall wealth to enter the stock market. "For those individuals, other barriers, such as behavioral, cognitive and psychological constraints, are likely to dominate," the authors conclude.