How does household portfolio diversification vary with financial sophistication and advice?


Gaudecker, Hans-Martin von


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URL: https://ub-madoc.bib.uni-mannheim.de/3131
URN: urn:nbn:de:bsz:180-madoc-31313
Document Type: Working paper
Year of publication: 2011
The title of a journal, publication series: MEA Discussion Papers
Volume: 238
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Veröffentlichungen des MEA (Mannheim Research Institute For the Economics of Aging) > MEA Discussion Papers
Subject: 330 Economics
Classification: JEL: D14 D12 G11 ,
Subject headings (SWD): Dänemark , Sparen , Finanzberatung , Diversifikation , Haushalt
Keywords (English): Household portfolios , diversification , financial literacy , financial advice
Abstract: Economic theory suggests that households should invest their financial wealth in a combination of cash and a well-diversified equity portfolio. Yet, many households' equity investments are strongly concentrated in a few assets. Attempts to explain this discrepancy have included low levels of cognitive skills and/or financial knowledge; and poor or misguided financial advice. In order to investigate these claims empirically, I construct detailed portfolios for the respondents to a Dutch household survey. The data allow me to estimate the portfolios' risk-return properties without resorting to assumptions about characteristics of specific asset classes. Controlling for a large number of covariates, my results show that the combination of low numerical-financial skills and not seeking advice from other persons is strongly associated with the largest losses from underdiversification, whereas financial knowledge does not seem to have much of an effect.
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Gaudecker, Hans-Martin von (2011) How does household portfolio diversification vary with financial sophistication and advice? Open Access MEA Discussion Papers Mannheim 238 [Working paper]
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