Financial Literacy, Cognitive Ability and Financial Advice-Seeking

62 Pages Posted: 12 Jun 2012

See all articles by Marc Kramer

Marc Kramer

University of Groningen - Faculty of Economics and Business - Department of Economics, Econometrics & Finance

Date Written: June 11, 2012

Abstract

This paper aims at identifying the possible link between financial literacy, cognitive ability and the propensity to seek financial expert help. We use bank and survey data collected from a randomly selected and representative sample of Dutch retail investors. We find that perceived financial literacy is negatively associated with asking for financial expert help in making investment decisions, confirming the competence effect of Heath and Tversky (1991). Consistent with these finding is that perceived financial literacy strongly relates to perceived (dis)advantages of execution-only or advised investing. This supports the idea that financial advice serves a substitute role for those who view themselves as less financially literate. Both measured financial literacy and cognitive ability are not related to advice seeking, which implies that advice is not a sufficient remedy for low literate or low cognitive able individuals. We also document some other interesting determinants of advice-seeking. Low educated and risk-tolerant investors exhibit a lower propensity to seek advice, while wealthy, older investors who place trust in advisers seek advice more often.

Keywords: Behavioral Finance, Household Finance, Financial Advice, Financial Literacy, Cognitive Ability

JEL Classification: D14, D81, D83, G11, G24

Suggested Citation

Kramer, Marc, Financial Literacy, Cognitive Ability and Financial Advice-Seeking (June 11, 2012). Available at SSRN: https://ssrn.com/abstract=2081795 or http://dx.doi.org/10.2139/ssrn.2081795

Marc Kramer (Contact Author)

University of Groningen - Faculty of Economics and Business - Department of Economics, Econometrics & Finance ( email )

Postbus 72
9700 AB Groningen
Netherlands

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