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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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14699.

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Date of creation: Feb 2009
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Publication status: published as Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Measuring the Financial Sophistication of Households," American Economic Review, American Economic Association, vol. 99(2), pages 393-98, May.
Handle: RePEc:nbr:nberwo:14699

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  1. Bilias, Yannis & Georgarakos, Dimitris & Haliassos, Michael, 2006. "Portfolio inertia and stock market fluctuations," CFS Working Paper Series, Center for Financial Studies (CFS) 2006/14, Center for Financial Studies (CFS).
  2. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, American Finance Association, vol. 61(4), pages 1553-1604, 08.
  3. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2006. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 2107, Harvard - Institute of Economic Research.
  4. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," CeRP Working Papers 66, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  5. B. Douglas Bernheim & Antonio Rangel, 2009. "Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics-super-," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(1), pages 51-104, February.
  6. William N. Goetzmann & Alok Kumar, 2004. "Equity Portfolio Diversification," Yale School of Management Working Papers, Yale School of Management ysm17, Yale School of Management.
  7. 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, MIT Press, vol. 124(1), pages 301-348, February.
  8. Douglas Bernheim & Antonio Rangel, 2007. "Beyond Revealed Preference Choice Theoretic Foundations for Behavioral Welfare Economics," Discussion Papers, Stanford Institute for Economic Policy Research 07-031, Stanford Institute for Economic Policy Research.
  9. Julie Agnew & Pierluigi Balduzzi & Annika Sundén, 2003. "Portfolio Choice and Trading in a Large 401(k) Plan," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 193-215, March.
  10. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, American Finance Association, vol. 30(2), pages 585-603, May.
  11. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2008. "Trusting the Stock Market," Journal of Finance, American Finance Association, American Finance Association, vol. 63(6), pages 2557-2600, December.
  12. Campbell, John & Calvert, Lauren E. & Sodini, Paolo, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," Scholarly Articles 2617031, Harvard University Department of Economics.
  13. Ravi Dhar & Ning Zhu, 2006. "Up Close and Personal: Investor Sophistication and the Disposition Effect," Management Science, INFORMS, INFORMS, vol. 52(5), pages 726-740, May.
  14. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, American Finance Association, vol. 53(5), pages 1775-1798, October.
  15. 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.
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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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