How does household portfolio diversification vary with financial sophistication and advice?

Hans-Martin von Gaudecker

No 11238, MEA discussion paper series from Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy

Abstract: Economic theory suggests that households should invest their financial wealth in a combination of cash and a well-diversified equity portfolio. Yet, many households' equity investments are strongly concentrated in a few assets. Attempts to explain this discrepancy have included low levels of cognitive skills and/or financial knowledge; and poor or misguided financial advice. In order to investigate these claims empirically, I construct detailed portfolios for the respondents to a Dutch household survey. The data allow me to estimate the portfolios' risk-return properties without resorting to assumptions about characteristics of specific asset classes. Controlling for a large number of covariates, my results show that the combination of low numerical-financial skills and not seeking advice from other persons is strongly associated with the largest losses from underdiversification, whereas financial knowledge does not seem to have much of an effect.

JEL-codes: D12 D14 G11 (search for similar items in EconPapers)
Date: 2011-03-22
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Citations: View citations in EconPapers (11)

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