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Naïve advice in financial decision making: Hidden costs of a free offer

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  • Sprenger, Julia

Abstract

The current study examines individual decision making in the field of personal finance. A laboratory experiment investigates the way naïve advice influences the decisionmaking process. When advice is offered on demand, participants prefer expert over naïve advice. Although naïve advice is only half the price of expert advice, demand for naïve advice is negligible. When naïve advice is given unsolicited, however, it has nevertheless a strong impact on the decision process by lowering engagement in information acquisition and promoting a passive adoption of the recommended option. While high levels of financial literacy buffer this effect, issuing a warning does not. In case compliance with naïve advice leads to a low decision quality and the saving in information acquisition costs does not make up for this effect, the free offer of naïve advice produces financial losses. This can be interpreted as hidden costs of free naïve advice resulting from a switch in information strategy. People with low financial literacy are most vulnerable to this effect.

Suggested Citation

  • Sprenger, Julia, 2016. "Naïve advice in financial decision making: Hidden costs of a free offer," Ruhr Economic Papers 656, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
  • Handle: RePEc:zbw:rwirep:656
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    References listed on IDEAS

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    1. Annamaria Lusardi & Olivia Mitchell, 2007. "Financial Literacy and Retirement Planning: New Evidence from the Rand American Life Panel," Working Papers wp157, University of Michigan, Michigan Retirement Research Center.
    2. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    3. Yaniv, Ilan, 2004. "Receiving other people's advice: Influence and benefit," Organizational Behavior and Human Decision Processes, Elsevier, vol. 93(1), pages 1-13, January.
    4. Gino, Francesca, 2008. "Do we listen to advice just because we paid for it? The impact of advice cost on its use," Organizational Behavior and Human Decision Processes, Elsevier, vol. 107(2), pages 234-245, November.
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    More about this item

    Keywords

    Financial literacy; financial decision making; experiment; naïve advice;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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