Working Paper

Confidence, Financial Literacy and Investment in Risky Assets: Evidence from the Survey of Consumer Finances


Abstract: We employ recent Survey of Consumer Finances (SCF) microdata from the US to analyze the impacts of confidence in one’s own financial knowledge, confidence in the economy, and objective financial literacy on investment in risky financial assets (equity and bonds) on both the extensive and intensive margins. Controlling for a rich set of covariates including risk aversion, we find that objective financial literacy is positively related to investment in risky assets as well as debt securities. Moreover, confidence in own financial skills additionally increases the probability of holding risky assets and bonds. While these relationships are rather robust for the extensive margin, they break down with regard to the conditional share of financial wealth in risky assets of those who actually hold them. The relevance of financial literacy as well as confidence varies considerably with the distribution of wealth as well as across several socio-economic dimensions such as age, education and race.

Keywords: Financial literacy; Confidence; Risky assets; Household finance; Survey data; Portfolio allocation;

JEL Classification: D12; D14; D31; D91; G11; I20;

https://doi.org/10.17016/FEDS.2020.004

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2020-01-16

Number: 2020-004

Pages: 43 p.