Financial Literacy and Stock Market Participation

Abstract

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.

Saving Behavior and Portfolio Choice After Retirement

“…An alternative explanation might be that the majority of widowed persons are female. Females are more risk averse and less experienced in making financial decisions regarding stock ownership; Van Rooij et al (2011). Table 4 shows that there is indeed a clear association between wealth and the composition of the financial portfolio.…”

Financial literacy, financial advice, and financial behavior

“…Behrmann et al 2012;Klapper et al 2013;, iterated principal factor analysis (e.g. van Rooij et al 2011b), or cluster analysis (e.g. Lusardi and Tufano 2015).…”

Finance for All: The Impact of Financial Literacy Training in Compulsory Secondary Education in Spain

“…The average performance of boys on the math test is 473 in the treated schools, a slightly inferior …gure than that of the rest of the schools, where it is 485. 26 For its part, the rate of grade repetition among "treated" girls is substantially lower in 2 5 Public schools and state-subsidized schools have an assigned area of in ‡uence in which residents are given preference for entering the school, while private schools do not have this preference. Still, some public or statesubsidized schools indicate having the capability of selecting their students regardless of their place of residence.…”