Financial Illiteracy and Stock Market Participation: Evidence from the RAND American Life Panel

37 Pages Posted: 12 Nov 2010

Date Written: October 11, 2010

Abstract

Financially unsophisticated consumers who consistently make sub-optimal financial decisions may suffer lasting consequences for long-term wealth accumulation and welfare. This paper focuses attention on a well-documented area of potentially suboptimal financial decision making: the lack of stock market participation. Using a broad-based assessment of financial literacy administered to a sample of older American respondents in the RAND American Life Panel (ALP), we use a novel strategy for establishing causation between stock-market related financial literacy and stock market participation, using knowledge of other financial topics as instrumental variables. We find that ignorance of stock market investment knowledge significantly reduces propensity to hold stocks. In particular, a decrease of one-standard deviation in the relevant measure suggests a decrease on the order of 10% in participation.

Keywords: Stock Market, Financial Literacy, Education, Illiteracy, Investment, Behavior, Participation

Suggested Citation

Yoong, Joanne, Financial Illiteracy and Stock Market Participation: Evidence from the RAND American Life Panel (October 11, 2010). Pension Research Council Working Paper No. 2010-29, Available at SSRN: https://ssrn.com/abstract=1707523 or http://dx.doi.org/10.2139/ssrn.1707523

Joanne Yoong (Contact Author)

RAND Corporation ( email )

1200 South Hayes St
Arlington, VA 22202
United States

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