Abstract
In this paper, we investigate the contribution of behavioural characteristics to the financial literacy of UAE residents after controlling for demographic factors. Specifically, we test the relationship between financial literacy and behavioural biases such as representativeness, self-serving, overconfidence, loss aversion, and hindsight bias. Using data collected through survey questionnaires, we apply the methodology developed by the Organization of Economic Co-operation and Development (OECD) to compute financial literacy scores. Our overall results show that all behavioural biases except for overconfidence bias are positively related to financial literacy. Furthermore, some biases exhibit a stronger quantitative relationship with financial literacy than others. For example, hindsight bias displays the strongest link to financial literacy, followed by self-serving bias. The weakest but still statistically significant effect is loss aversion bias. Although biases, in general, have negative connotations, behavioural biases appear to be related to higher levels of financial literacy.
Highlights
Accepted: 18 August 2021Research on behavioural finance (e.g., Baker et al 2019) suggests that individuals, investors, and markets do not always act rationally and systematically deviate from optimal financial decision making
Our findings show that all significant variables have a positive statistical relationship with financial literacy
While Xue et al (2019) document a level of financial illiteracy in elderly citizens, people 18 to 24 years are unaware of how many funds they hold in their pension plan (ANZ Survey of Adult Financial Literacy in Australia 2008)
Summary
Research on behavioural finance (e.g., Baker et al 2019) suggests that individuals, investors, and markets do not always act rationally and systematically deviate from optimal financial decision making. An investigation of the relationships between behavioural biases of individuals, who experienced a financial shock, and financial literacy in the context of a crisis is of utmost relevance. The purpose of this paper is to investigate the effects of behavioural biases on the financial literacy of individuals during the COVID-19 crisis while controlling for demographics factors. The study focuses primarily on five behavioural biases: overconfidence bias, loss aversion bias, hindsight bias (i.e., overreaction to new information), representativeness bias, and self-serving bias and their role in explaining the financial literacy of individuals in times of a crisis. Our findings show that all significant variables (hindsight, self-serving, loss aversion, and representativeness bias) have a positive statistical relationship with financial literacy This trend indicates that respondents with any of these behavioural biases have a higher financial literacy than the respondents who do not exhibit them.
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