Protecting Investors from Themselves: Evidence from a Regulatory Intervention
Firth, C. (2020). Protecting investors from themselves: Evidence from a regulatory intervention. Journal of Behavioral and Experimental Finance, 27, 100329.
31 Pages Posted: 15 Jan 2020 Last revised: 26 Feb 2021
Date Written: October 26, 2019
Retail investors in securities suffer from biases and consequent investment under-performance. A plausible approach to improving this is to restrict the least skilful investors. I investigate an intervention which includes a mandatory assessment of investment knowledge and experience. I study the empirical relationship between investors’ actual investment portfolio outcomes, and their assessment results. Those assessed as “competent” made fewer mistakes, as benchmarked by a range of normative models. I show that the assessment is able to weakly screen out unskilled investors. However, the intervention’s high misclassification rate, under an analysis favorable to the scheme, highlights the challenges of this approach.
Keywords: screening; financial literacy; regulatory intervention; investment decisions; consumer protection; financial mistakes
JEL Classification: D12, D14, D18, G11, G28
Suggested Citation: Suggested Citation