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The impact of cognitive skills on investment decisions. An empirical assessment and policy suggestions

Lorenzo Esposito and Lorenzo Marrese ()
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Lorenzo Marrese: DISCE, Università Cattolica del Sacro Cuore

No dipe0019, DISCE - Quaderni del Dipartimento di Politica Economica from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: Results of behavioral economics pose a strong challenge to mainstream finance theory conclusions. We discuss, theoretically and empirically, the connections of cognitive skills, biases and financial decisions using the Cognitive Reflection Test (Frederick, 2005). In particular, we have chosen overconfidence, risk aversion, bandwagon effect, time preference and money illusion, among the biases most discussed in the literature. The experiment we conducted confirmed a role of the cognitive skills in determining the decision mechanism of the investor although not neatly, especially for more complex biases, such as money illusion. Finally, we expose policy alternatives, focusing on the role of financial education to tackle cognitive biases in finance and monetary policy.

Keywords: cognitive biases; financial education; behavioral economics; CRT (search for similar items in EconPapers)
JEL-codes: G41 (search for similar items in EconPapers)
Pages: 43
Date: 2021-07
New Economics Papers: this item is included in nep-cbe, nep-cwa, nep-exp, nep-fle, nep-hme, nep-mac and nep-neu
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