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Cutting Through the Fog: Financial Literacy and the Subjective Value of Financial Assets

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Abstract

We examine the impact of financial literacy on investors’ subjective valuation of financial assets. In a laboratory experiment, we study how the certainty equivalent of a risky lottery changes when varying the framing of the lottery – a financial asset vs. a coin toss – and participants’ level of financial literacy – via teaching basic financial notions. Enhancing financial literacy improves the understanding of the lottery’s structure and increases its certainty equivalent, thus offsetting the negative effects of the financial framing. Our results – which can be rationalized by ambiguity aversion – highlight the importance of promoting financial education to stimulate households’ financial market participation.

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  • Marco Nieddu & Lorenzo Pandolfi, 2018. "Cutting Through the Fog: Financial Literacy and the Subjective Value of Financial Assets," CSEF Working Papers 497, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:497
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    Keywords

    financial literacy; experimental finance; financial market participation; ambiguity aversion.;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid

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