Run, Walk, or Buy? Financial Literacy, Dual-Process Theory, and Investment Behavior

75 Pages Posted: 2 Nov 2012 Last revised: 28 Apr 2014

Markus Glaser

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Torsten Walther

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Date Written: April 16, 2014

Abstract

Combining recent empirical findings on the usefulness of financial literacy for investment decisions and literature from psychology, we argue that the behavior of people with a high level of financial literacy might depend on the prevalence of the two thinking styles according to dual-process theories: intuition and cognition. We hypothesize that a high level of financial literacy might be overruled if subjects believe in trusting their hunches. We test this hypothesis within an innovative experimental design which makes the participants experience the stock market development and their personal performance. Our results confirm the hypothesized interaction effect. We successfully replicate the findings in two follow-up experiments and show that this behavior has negative consequences on the risk-adjusted performance. Finally, we validate the conclusions in the field by analyzing the transaction records of a large European online broker. We contribute to the existing literature by providing a further step to understand the mechanism of how and when personal characteristics affect behavior.

Keywords: Individual Investors, Investor Behavior, Online Broker, Financial Literacy, Dual-Process Theories, Rational-Experiential Inventory

JEL Classification: G11, D81

Suggested Citation

Glaser, Markus and Walther, Torsten, Run, Walk, or Buy? Financial Literacy, Dual-Process Theory, and Investment Behavior (April 16, 2014). Available at SSRN: https://ssrn.com/abstract=2167270 or http://dx.doi.org/10.2139/ssrn.2167270

Markus Glaser

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Schackstra├če 4
Munich, 80539
Germany

Torsten Walther (Contact Author)

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Schackstra├če 4
Munich, 80539
Germany

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