Working Paper: NBER ID: w20137
Authors: Robert L. Clark; Annamaria Lusardi; Olivia S. Mitchell
Abstract: Using a unique new dataset linking administrative data on investment performance and financial knowledge, we examine whether investors who are more financially knowledgeable earn more on their retirement plan investments, compared to their less sophisticated counterparts. We find that risk-adjusted annual expected returns are 130 basis points higher for the most financially knowledgeable employees, and those scoring higher on our Financial Knowledge Index have slightly more volatile portfolios while they do no better diversifying their portfolios than their peers. Overall, financial knowledge does appear to help people invest more profitably; this may provide a rationale for efforts to enhance financial knowledge in the population at large.
Keywords: financial knowledge; 401k; investment performance; risk-adjusted returns
JEL Codes: D14; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial knowledge (G53) | risk-adjusted expected returns (G17) |
| financial knowledge (G53) | portfolio characteristics (G11) |
| risk-adjusted expected returns (G17) | retirement savings (D14) |
| financial knowledge (G53) | equity in portfolio (G11) |
| financial knowledge (G53) | idiosyncratic risk (D81) |