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Measuring the Financial Sophistication of Households

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  • Laurent E. Calvet
  • John Y. Campbell
  • Paolo Sodini

Abstract

This paper constructs an index of financial sophistication that, in comprehensive data on Swedish households, best explains a set of three investment mistakes: underdiversification, risky share inertia, and the tendency to sell winning stocks and hold losing stocks (the disposition effect). The index of financial sophistication increases strongly with financial wealth and household size, and to a lesser extent with education and proxies for financial experience. The index is strongly positively correlated with the share of risky assets held by a household.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 99 (2009)
Issue (Month): 2 (May)
Pages: 393-98

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Handle: RePEc:aea:aecrev:v:99:y:2009:i:2:p:393-98

Note: DOI: 10.1257/aer.99.2.393
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References

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  1. Calvet, Laurent E. & Campbell, John Y. & Sodini, Paolo, 2006. "Down or Out: Assessing The Welfare Costs of Household Investment Mistakes," Working Paper Series 195, Sveriges Riksbank (Central Bank of Sweden).
  2. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," NBER Working Papers 13565, National Bureau of Economic Research, Inc.
  3. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2005. "Trusting the Stock Market," CEPR Discussion Papers 5288, C.E.P.R. Discussion Papers.
  4. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc.
  5. Alok Kumar & William N. Goetzmann, 2001. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm236, Yale School of Management.
  6. Annette Vissing-Jorgensen, 2002. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," NBER Working Papers 8884, National Bureau of Economic Research, Inc.
  7. Bilias, Yannis & Georgarakos, Dimitris & Haliassos, Michalis, 2009. "Portfolio Inertia and Stock Market Fluctuations," CEPR Discussion Papers 7239, C.E.P.R. Discussion Papers.
  8. Campbell, John & Calvert, Lauren E. & Sodini, Paolo, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," Scholarly Articles 2617031, Harvard University Department of Economics.
  9. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight Or Flight? Portfolio Rebalancing by Individual Investors-super-," The Quarterly Journal of Economics, MIT Press, vol. 124(1), pages 301-348, February.
  10. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  11. B. Douglas Bernheim & Antonio Rangel, 2008. "Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics," NBER Working Papers 13737, National Bureau of Economic Research, Inc.
  12. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, vol. 93(1), pages 193-215, March.
  13. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, vol. 30(2), pages 585-603, May.
  14. Ravi Dhar & Ning Zhu, 2006. "Up Close and Personal: Investor Sophistication and the Disposition Effect," Management Science, INFORMS, vol. 52(5), pages 726-740, May.
  15. B. Douglas Bernheim & Antonio Rangel, 2009. "Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics-super-," The Quarterly Journal of Economics, MIT Press, vol. 124(1), pages 51-104, February.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. What households are financially sophisticated?
    by Economic Logician in Economic Logic on 2009-02-13 14:16:00
  2. Measuring the Financial Sophistication of Households
    by Liam Delaney in Geary Behaviour Centre on 2009-05-18 12:04:00
  3. Measuring the Financial Sophistication of Households
    by Liam Delaney in Geary Behaviour Centre on 2009-02-15 22:21:00
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