Overconfidence, Financial Advice Seeking and Household Portfolio Under-Diversification

Stijn P. M. Broekema and Marc M. Kramer
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Stijn P. M. Broekema: Faculty of Economics & Business, University of Groningen, Nettelbosje 2, 9747 AE Groningen, The Netherlands
Marc M. Kramer: Faculty of Economics & Business, University of Groningen, Nettelbosje 2, 9747 AE Groningen, The Netherlands

JRFM, 2021, vol. 14, issue 11, 1-15

Abstract: This paper examines the relationship between overconfidence and losses from under-diversification among Dutch investors. We find that a lack of proper portfolio diversification is positively associated with overconfidence. Part of this relationship is mediated through the lower propensity of overconfident individuals to hire a professional financial adviser. We use data from the 2005 wave of the DNB Dutch Household Survey that provides us with detailed portfolio data of 257 investors. We proxy for overconfidence by exploiting the difference between measured and self-assessed financial literacy, and use this proxy in a regression model (with and without mediation) to explain the difference between the actual households return and the return that could have been obtained by selecting a portfolio on the efficient frontier with equivalent risk. Our results contribute to the current discussion among policy makers on the role of financial advice and self-perceptions in household financial decision-making.

Keywords: portfolio diversification; overconfidence; financial advice; financial literacy; individual investors (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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