Working Paper: NBER ID: w14699
Authors: Laurent E. Calvet; 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.
Keywords: No keywords provided
JEL Codes: G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial sophistication (G53) | Fewer investment mistakes (G11) |
| Financial wealth (G51) | Financial sophistication (G53) |
| Household size (D10) | Financial sophistication (G53) |
| Financial wealth (G51) | Underdiversification (yht1) (G11) |
| Financial wealth (G51) | Risky share inertia (yht2) (G40) |
| Financial wealth (G51) | Disposition effect (yht3) (D91) |
| Education (I29) | Financial sophistication (G53) |
| Financial experience (G53) | Financial sophistication (G53) |