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“Open line of credit:” Under no borrowing constraints, how do young adults invest?

Author

Listed:
  • Michael Insler

    (United States Naval Academy)

  • Pamela Schmitt

    (United States Naval Academy)

  • Jake Compton

    (United States Navy)

Abstract

Students at the United States Naval Academy have the opportunity to take a “Career Starter Loan.” Two military-oriented banks provide these loans exogenously at a low interest rate that does not depend on individual credit scores. Using survey data, this paper examines investment behavior in relation to risk profiles, self-reported planning horizons, and other individual characteristics. The data offers novel insights into the investment behavior of college-aged individuals, an infrequently studied group in behavioral finance. Simple OLS and Tobit models reveal that: (1) cognitive ability is strongly and positively associated with more investment and riskier choices; (2) demographic background characteristics relate to investment behavior, as respondents from wealthier backgrounds invest more and with more risk; (3) individuals with superior financial literacy tend to invest more, typically in equity markets; (4) personality traits, such as the Myers-Briggs Type Indicator and planning horizon length, can also predict investment behavior. Lastly, we explore a notion of “investment exuberance” to see which factors might relate to young investors’ confidence in their choices.

Suggested Citation

  • Michael Insler & Pamela Schmitt & Jake Compton, 2013. "“Open line of credit:” Under no borrowing constraints, how do young adults invest?," Departmental Working Papers 41, United States Naval Academy Department of Economics.
    • Handle: RePEc:usn:usnawp:41
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    File URL: http://www.usna.edu/EconDept/RePEc/usn/wp/usnawp41.pdf
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    References listed on IDEAS

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    1. Catherine C. Eckel & Cathleen Johnson & Claude Montmarquette & Christian Rojas, 2007. "Debt Aversion and the Demand for Loans for Postsecondary Education," Public Finance Review, , vol. 35(2), pages 233-262, March.
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    Cited by:

    1. Michael Insler & Pamela Schmitt & Jake Compton, 2013. "Does everyone accept a free lunch? Decision making under (almost) zero cost borrowing," Departmental Working Papers 42, United States Naval Academy Department of Economics.

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