Cognitive ability and household portfolio diversification: Evidence from China

Abstract

The low level of portfolio diversification is one of the potential high-cost deviations. Based on the data from the 2010 and 2012 China Family Panel Studies(CFPS), this paper empirically analyzes the impact of cognitive ability on the Chinese households portfolio diversification. The results show that cognitive ability has a significant positive effect on the diversification of household portfolio, including the more asset classes, the higher the diversification index of the portfolio, the greater the likelihood of buying a fund, and the higher the proportion of funds of the three assets. After considering the possible endogeneity, the effect of cognitive ability on the diversification of household portfolio is still significantly positive. Using different models, grouping by wealth and level of financial development, the results of this article are robust. We contribute by adding new evidence of diversified portfolio from emerging markets and expanding the scope of cognitive research.