Abstract
This paper analyzes the effect of financial knowledge and confidence in shaping individual investment choices, sustainable debt behavior, and preferences for socially and environmentally responsible financial companies. Exploiting data from the “Italian Literacy and Financial Competence Survey” (IACOFI) carried out by the Bank of Italy in early 2020, we address potential endogeneity concerns in order to investigate the causal effect of objective financial knowledge on individual financial behaviors. To this aim, we perform endogenous probit regressions, using the respondent’s long-term planning attitude, the use of information and communication technology devices, and the financial knowledge of peers as additional instrumental variables. Our main empirical findings show that objective financial knowledge exerts a positive and significant effect on financial market participation and preferences for ethical financial companies. Moreover, we provide strong empirical evidence about the role of confidence biases on individual financial behaviors. In particular, overconfident individuals display a higher probability of making financial investments, experiencing losses due to investment fraud, and being over-indebted. Conversely, underconfident individuals exhibit suboptimal investment choices, but are less likely to engage in risky financial behaviors.
Highlights
Introduction and MotivationThe literature has provided strong evidence that higher levels of financial knowledge are associated with more sustainable financial behaviors and higher levels of financial health [1,2,3,4,5,6]
Focusing on the extended specification (model (b)), we find that financial knowledge remains statistically insignificant, whereas confidence biases in assessing one’s own financial competencies emerge as significant determinants of individual susceptibility to investment fraud
This paper contributes to the existing literature by providing evidence about the role of financial knowledge and confidence in shaping individual financial market participation, sustainable debt behavior, and preferences for socially and environmentally responsible financial companies
Summary
Introduction and MotivationThe literature has provided strong evidence that higher levels of financial knowledge are associated with more sustainable financial behaviors and higher levels of financial health [1,2,3,4,5,6]. Individuals who are more financially literate are more willing to seek professional financial advice or counselling than people who are less financially literate [8] and are better able to detect financial fraud [9]. They have high awareness of the potential financial losses or gains derived from suboptimal financial decisions and are more willing to seek financial advice [10]. As demonstrated by van Rooij et al [11], financial literacy could improve wealth accumulation and saving plans, being positively
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