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

See all articles by Chris Firth

Chris Firth

University of Warwick - Warwick Business School

Date Written: October 26, 2019

Abstract

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

Firth, Chris, Protecting Investors from Themselves: Evidence from a Regulatory Intervention (October 26, 2019). Firth, C. (2020). Protecting investors from themselves: Evidence from a regulatory intervention. Journal of Behavioral and Experimental Finance, 27, 100329., Available at SSRN: https://ssrn.com/abstract=3509807 or http://dx.doi.org/10.2139/ssrn.3509807

Chris Firth (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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