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How Much Can Financial Literacy Help?


  • Luigi Guiso


  • Eliana Viviano

    (Bank of Italy)


We merge survey data on a sample of individual investors containing test-based measures of financial literacy with administrative records on their assets holding and trades before, during and after the financial crisis of September 2008. This dataset allows us to design three tests of the benefits of financial literacy by comparing the decisions actually taken by individuals with a dominated alternative. We find that high-literacy investors are better at timing the market, since conditional on exiting the stock market they are more likely to exit before rather than after the crash following the collapse of Lehman Brothers. High-literacy investors are also more likely to trade according to the prescriptions of normative models and to detect intermediaries’ potential conflicts of interest. However, though statistically significant these effects are economically small. In fact, far too many investors, even among those with high literacy, tend to choose the dominated alternative along all dimensions of choice examined. This suggests that literacy may be a poor edge against financial mistakes.

Suggested Citation

  • Luigi Guiso & Eliana Viviano, 2013. "How Much Can Financial Literacy Help?," EIEF Working Papers Series 1325, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2013.
  • Handle: RePEc:eie:wpaper:1325

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    References listed on IDEAS

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    Cited by:

    1. Antonia Grohmann & Theres Klühs & Lukas Menkhoff, 2017. "Does Financial Literacy Improve Financial Inclusion? Cross Country Evidence," Discussion Papers of DIW Berlin 1682, DIW Berlin, German Institute for Economic Research.
    2. Bianchi, Milo, 2017. "Financial Literacy and Portfolio Dynamics," TSE Working Papers 17-808, Toulouse School of Economics (TSE).
    3. Bannier, Christina E. & Neubert, Milena, 2016. "Actual and perceived financial sophistication and wealth accumulation: The role of education and gender," CFS Working Paper Series 528, Center for Financial Studies (CFS).
    4. Love, David & Phelan, Gregory, 2015. "Hyperbolic discounting and life-cycle portfolio choice," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(04), pages 492-524, October.
    5. Bannier, Christina E. & Schwarz, Milena, 2017. "Skilled but unaware of it: Occurrence and potential long-term effects of females' financial underconfidence," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168188, Verein für Socialpolitik / German Economic Association.
    6. repec:spr:jbecon:v:87:y:2017:i:5:d:10.1007_s11573-017-0853-9 is not listed on IDEAS
    7. Casarin Roberto & Casnici Niccolò & Dondio Pierpaolo & Squazzoni Flaminio, 2015. "Back to Basics! The Educational Gap of Online Investors and the Conundrum of Virtual Communities," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 51-69, June.
    8. Annamaria Lusardi, 2015. "Risk Literacy," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(1), pages 5-23, March.
    9. Giovanni Battista Pittaluga, 2016. "Quale tutela del consumatore finanziario," ECONOMIA E DIRITTO DEL TERZIARIO, FrancoAngeli Editore, vol. 2016(1), pages 7-16.
    10. Eloisa Campioni & Vittorio Larocca & Loredana Mirra & Luca Panaccione, 2017. "Financial literacy and bank runs: an experimental analysis," CEIS Research Paper 402, Tor Vergata University, CEIS, revised 07 Jul 2017.
    11. Marianna Brunetti & Rocco Ciciretti & Ljubica Djordjevic, 2016. "Till Mortgage Do Us Part: Refinancing Costs and Household’s Bank Switching," CEIS Research Paper 364, Tor Vergata University, CEIS, revised 13 Dec 2017.
    12. Zuzana Brokesova & Andrej Cupak & Gueorgui Kolev, 2017. "Financial literacy and voluntary savings for retirement in Slovakia," Working and Discussion Papers WP 10/2017, Research Department, National Bank of Slovakia.
    13. Ewa Mazurek-Krasodomska & Gabriela Golawska & Anna Rzeczycka, 2017. "Financial Capacity: Do students know what they need to know?," Working Papers 2017-04, Faculty of Economic Sciences, University of Warsaw.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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