Financial literacy and stock market participation

  • Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks. JEL Classification: D91, G11, D80

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Metadaten
Author:Maarten van Rooij, Annamaria Lusardi, Rob J. M. Alessie
URN:urn:nbn:de:hebis:30-50981
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2007,27
Series (Serial Number):CFS working paper series (2007, 27)
Document Type:Working Paper
Language:English
Year of Completion:2007
Year of first Publication:2007
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2007/11/02
Tag:financial sophistication; knowledge of economics and finance; portfolio choice
GND Keyword:Aktienmarkt; Kenntnis
HeBIS-PPN:194620700
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht