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Mediation between financial risk tolerance and equity ownership: assessing the role of financial knowledge underconfidence

Author

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  • Wookjae Heo

    (South Dakota State University)

  • Abed G. Rabbani

    (University of Missouri)

  • Jae Min Lee

    (Minnesota State University, Mankato)

Abstract

Investing in equity is not an easy task. People with varying levels of financial risk tolerance would demonstrate a different level of equity investment. However, investors' tendency to underestimate their financial knowledge is likely to mediate the association between financial risk tolerance and equity ownership since people tend to underestimate their knowledge and take a lower risk when the task is hard to execute. The purpose of the study is to evaluate the mediating role of underconfidence on the association between financial risk tolerance and equity ownership. Confirmatory factor analysis (CFA) and structural equation modeling (SEM) were used to evaluate the conceptual model. The results show that it is possible to assess underconfidence using objective and subjective financial knowledge, and underconfidence has a significant mediating effect between financial risk tolerance and equity ownership. Although it is challenging to change a person’s risk tolerance, financial services professionals may help their clients by addressing underconfidence.

Suggested Citation

  • Wookjae Heo & Abed G. Rabbani & Jae Min Lee, 2021. "Mediation between financial risk tolerance and equity ownership: assessing the role of financial knowledge underconfidence," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 26(3), pages 169-180, September.
    • Handle: RePEc:pal:jofsma:v:26:y:2021:i:3:d:10.1057_s41264-021-00088-y
    DOI: 10.1057/s41264-021-00088-y
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    2. David Aristei & Manuela Gallo, 2021. "Financial Knowledge, Confidence, and Sustainable Financial Behavior," Sustainability, MDPI, vol. 13(19), pages 1-21, September.

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    More about this item

    Keywords

    Equity ownership; Financial knowledge; Financial overconfidence; Financial underconfidence; Financial risk tolerance;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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