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

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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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