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Investor confidence and high financial literacy jointly shape investments in risky assets

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  • Cupák, Andrej
  • Fessler, Pirmin
  • Hsu, Joanne W.
  • Paradowski, Piotr R.

Abstract

Households consistently invest less in equities and bonds than predicted by economic theory. We explain this from a behavioral economics perspective and distributional analysis using rich US survey microdata. We find that higher investor self-confidence in her financial abilities and financial literacy jointly increase the probability of investing in equities. Conditional on participation, confidence in the macroeconomy additionally drives portfolio shares in equities. We extend the existing research to bonds, for which these relationships are weaker. Unconditional quantile regression estimates reveal substantial heterogeneity in effects across the distribution of bond holdings. These relationships are not explained by risk preferences. Our results are consistent with lack of investor self-confidence, or fear of risk, posing a barrier to investing in risky assets, particularly for stock market participation. Promoting investor self-confidence along with financial literacy potentially encourages more diversified household portfolios.

Suggested Citation

  • Cupák, Andrej & Fessler, Pirmin & Hsu, Joanne W. & Paradowski, Piotr R., 2022. "Investor confidence and high financial literacy jointly shape investments in risky assets," Economic Modelling, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:ecmode:v:116:y:2022:i:c:s026499932200270x
    DOI: 10.1016/j.econmod.2022.106033
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    More about this item

    Keywords

    Financial literacy; Investor confidence; Portfolio diversification; Risky assets; Household finance; US;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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