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How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?
Author(s) -
GAUDECKER HANSMARTIN VON
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12231
Subject(s) - financial literacy , diversification (marketing strategy) , portfolio , finance , business , literacy , advice (programming) , investment (military) , actuarial science , economics , marketing , economic growth , political science , politics , computer science , law , programming language
Household investment mistakes are an important concern for researchers and policymakers alike. Portfolio underdiversification ranks among those mistakes that are potentially most costly. However, its roots and empirical importance are poorly understood. I estimate quantitatively meaningful diversification statistics and investigate their relationship with key variables. Nearly all households that score high on financial literacy or rely on professionals or private contacts for advice achieve reasonable investment outcomes. Compared to these groups, households with below‐median financial literacy that trust their own decision‐making capabilities lose an expected 50 bps on average. All group differences stem from the top of the loss distribution.