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The disposition effect is implicitly assumed to be constant over time. However, drivers of the disposition effect (preferences and beliefs) are rather countercyclical. We use individual investor trading data covering several boom and bust periods (2001-2015). We show that the disposition effect is countercyclical, i.e. is higher in bust than in boom periods. Our findings are driven by individuals being 25% more likely to realize gains in bust than in boom periods. These changes in investors’ selling behavior can be linked to changes in investors’ risk aversion and in their beliefs across financial market cycles.
We examine the relationship between household wealth and self-control. Although self-control has been linked to consumption and financial behavior, its measurement remains an open issue. We employ a definition of self-control failure that follows literature in psychology, suggesting that three factors can render self-control defective: lack of planning, lack of monitoring, and lack of commitment to pre-set plans. Our measure combines those three ingredients and can be computed using a standard representative survey. We find that self-control failure is strongly associated with different household net wealth measures and with self-assessed financial distress.
Since the financial crisis financial literacy has attracted growing interest among researchers and policy makers, as there is international empirical evidence that financial literacy is poor among both adults and students. In Germany we have almost no empirical evidence on financial literacy, especially in the case of students attending secondary schools, as financial education has not featured on German school curricula to date. Besides, Germany has not yet participated in the optional financial literacy module of PISA, which was offered for the first time in 2012. However, a lack of private pension provisioning, in spite of demographic change, and low stock ownership among German households indicate a deficit in financial knowledge and skills in this country as well.
In this paper we investigate financial literacy among students aged 14 to 16 attending a secondary school in the state of Hesse. The foundation is a test designed according to international standards. The statistical analysis of the test reveals substantial deficits in key areas of financial literacy. Particular deficits could be identified in the fields of basic knowledge of financial matters and, to an even greater degree, in more advanced concepts such as risk diversification. Applying interest calculations to financial matters turned out to be problematic for many students.
Furthermore, the paper analyses the impact of gender and type of school on the overall test score as well as test performance in specific tasks. The findings suggest that financial matters should be covered in some form at secondary schools. In light of the potentially far-reaching consequences of financial illiteracy for financial wellbeing, German participation in future PISA financial literacy tests seems highly advisable to gain a deeper understanding of the preliminary findings presented in this paper.
Using data from the US Health and Retirement Study, we study the causal effect of increased health insurance coverage through Medicare and the associated reduction in health-related background risk on financial risk-taking. Given the onset of Medicare at age 65, we identify our effect of interest using a regression discontinuity approach. We find that getting Medicare coverage induces stockholding for those with at least some college education, but not for their less-educated counterparts. Hence, our results indicate that a reduction in background risk induces financial risk-taking in individuals for whom informational and pecuniary stock market participation costs are relatively low.
Lack of privacy due to surveillance of personal data, which is becoming ubiquitous around the world, induces persistent conformity to the norms prevalent under the surveillance regime. We document this channel in a unique laboratory---the widespread surveillance of private citizens in East Germany. Exploiting localized variation in the intensity of surveillance before the fall of the Berlin Wall, we show that, at the present day, individuals who lived in high-surveillance counties are more likely to recall they were spied upon, display more conformist beliefs about society and individual interactions, and are hesitant about institutional and social change. Social conformity is accompanied by conformist economic choices: individuals in high-surveillance counties save more and are less likely to take out credit, consistent with norms of frugality. The lack of differences in risk aversion and binding financial constraints by exposure to surveillance helps to support a beliefs channel.
Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We examine the role of social influences on debt culture, emanating from perceived average income of peers. Utilizing unique information from a household survey representative of the Dutch population, that circumvents the issue of defining the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing, especially among those who consider themselves poorer than their peers; and on indebtedness, suggesting a link to financial distress. We employ a number of approaches to rule out spurious associations and to handle correlated effects.
Households regularly fail to make optimal financial decisions. But what are the underlying reasons for this? Using two conceptually distinct measures of time inconsistency based on bank account transaction data and behavioral measurement experiments, we show that the excessive use of bank account overdrafts is linked to time inconsistency. By contrast, there is no correlation between a survey-based measure of financial literacy and overdraft usage. Our results indicate that consumer education and information may not suffice to overcome mistakes in households’ financial decision-making. Rather, behaviorally motivated interventions targeting specific biases in decision-making should also be considered as effective policy tools.