Financial Literacy and Behavioral Biases

Purpose and goal

The project is designed to reveal to what extent financial literacy co-varies with some well-known behavioral traits. In particular, we study the relation between financial literacy, overconfidence, and optimism. Through research design based on Moore and Healy (2008), we are able to retrieve good estimates of both of these behavioral traits, as well as a ´better-than-average´ effect, in which investors, perhaps falsely, believe that they are better than average Investors.

Results and expected effects

Like previous work, we find that high literacy respondents are more likely to save for a rainy day, plan for retirement, and are more likely to pay attention to fees when choosing credit cards. However, this is mostly driven by perceived, rather than actual, financial literacy: controlling for beliefs, actual literacy has low power to predict financial engagement. Moreover, behavior bias drives financial participation among low literacy respondents. This has important implications for policy and for the design of institutions aimed at increasing literacy and protecting consumers.

Approach and implementation

We sampled survey responses from two channels. We collaborated with the Swedish FSA and Folkuniversitetet through their network ´Gilla Din Ekonomi´. Subjects taking the survey were waived the fee of the course (SEK 195), and in turn paid by the project. We also teamed up with LinkedIn, the world´s largest professional network on the Internet. The survey was conducted in two waves on the Internet where we invited more than 500,000 people to take part, with around 5,000 responses. Our results have resulted in a first draft of a working paper.