Chapter

Financial Illiteracy and Stock Market Participation: Evidence from the RAND American Life Panel

Joanne Yoong

in Financial Literacy: Implications for Retirement Security and the Financial Marketplace

Published in print October 2011 | ISBN: 9780199696819
Published online January 2012 | e-ISBN: 9780191732089 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199696819.003.0005

Series: Pensions Research Council

Financial Illiteracy and Stock Market Participation: Evidence from the RAND American Life Panel

Show Summary Details

Preview

Financially unsophisticated consumers who consistently make suboptimal financial decisions may suffer lasting consequences for long-term wealth accumulation and welfare. This paper focuses attention on a well-documented area of potentially suboptimal financial decision-making: the lack of stock market participation. Using a broad-based assessment of financial literacy administered to a sample of older American respondents in the RAND American Life Panel (ALP), we use a novel strategy for establishing causation between stock market-related financial literacy and stock market participation, using knowledge of other financial topics as instrumental variables. We find that ignorance of stock market investment knowledge significantly reduces propensity to hold stocks. In particular, a decrease of one standard deviation in the relevant measure suggests a decrease on the order of 10 percent in participation.

Keywords: stock market; financial literacy; education; illiteracy; investment; behavior; participation

Chapter.  8534 words. 

Subjects: Pensions

Full text: subscription required

How to subscribe Recommend to my Librarian

Buy this work at Oxford University Press »

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.