Investment in Financial Information and Portfolio Performance

38 Pages Posted: 6 Oct 2020

See all articles by Luigi Guiso

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF)

Tullio Jappelli

University of Naples Federico II

Date Written: October 1, 2020

Abstract

Financial information allows investors to condition the portfolio allocation on valuable signals on asset returns. Therefore investors have incentives to spend on information gathering. If interpreted correctly, information signals allow investors to obtain higher returns and more efficient portfolios. Since information is costly, wealthier and more risk tolerant investors have stronger incentives to invest in information. Overconfident investors who overstate the value of the information still obtain higher average returns but end up with less efficient portfolios. We study these implications using two unique surveys of customers of a leading Italian bank, with portfolio data and measures of individual investment in financial information. We find that investment in information is positively associated with returns to financial wealth and negatively associated with the portfolio Sharpe ratio. Furthermore, the latter falls with proxies of overconfidence. We relate these findings to the wealth inequality debate.

Suggested Citation

Guiso, Luigi and Jappelli, Tullio, Investment in Financial Information and Portfolio Performance (October 1, 2020). Economica, Vol. 87, Issue 348, pp. 1133-1170, 2020, Available at SSRN: https://ssrn.com/abstract=3704395 or http://dx.doi.org/10.1111/ecca.12338

Luigi Guiso (Contact Author)

Einaudi Institute for Economics and Finance (EIEF) ( email )

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HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Tullio Jappelli

University of Naples Federico II ( email )

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