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Measuring the Financial Sophistication of Households

Author

Listed:
  • Laurent-Emmanuel Calvet

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • 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.

Suggested Citation

  • Laurent-Emmanuel Calvet & John Y. Campbell & Paolo Sodini, 2009. "Measuring the Financial Sophistication of Households," Post-Print hal-00459687, HAL.
  • Handle: RePEc:hal:journl:hal-00459687
    DOI: 10.1257/aer.99.2.393
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    References listed on IDEAS

    as
    1. Annette Vissing-Jorgensen, 2000. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," Econometric Society World Congress 2000 Contributed Papers 1102, Econometric Society.
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    12. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 301-348.
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    More about this item

    Keywords

    Households; Financial Sophistication;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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