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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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Handle: RePEc:nbr:nberwo:14699

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References

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  1. M.C.J. van Rooij & Annamaria Lusardi & R. Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers 07-23, Utrecht School of Economics.
  2. Sodini, Paolo & Campbell, John & Calvet, Laurent E., 2007. "Down or Out: Assessing the Welfare Costs of Household Investment Mistakes," Scholarly Articles 3122488, Harvard University Department of Economics.
  3. William N. Goetzmann & Alok Kumar, 2008. "Equity Portfolio Diversification," Review of Finance, European Finance Association, vol. 12(3), pages 433-463.
  4. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  5. 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.
  6. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, 08.
  7. 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.
  8. 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.
  9. Bilias, Yannis & Georgarakos, Dimitris & Haliassos, Michalis, 2009. "Portfolio Inertia and Stock Market Fluctuations," CEPR Discussion Papers 7239, C.E.P.R. Discussion Papers.
  10. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2005. "Trusting the Stock Market," CEPR Discussion Papers 5288, C.E.P.R. Discussion Papers.
  11. 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.
  12. Douglas Bernheim & Antonio Rangel, 2007. "Beyond Revealed Preference Choice Theoretic Foundations for Behavioral Welfare Economics," Discussion Papers 07-031, Stanford Institute for Economic Policy Research.
  13. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2008. "Fight or Flight? Portfolio Rebalancing by Individual Investors," NBER Working Papers 14177, National Bureau of Economic Research, Inc.
  14. 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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