How Risk Aversion and Financial Literacy Shape Young Adults’ Investment Preferences

Andreea Stoian, Nicoleta Vintilă, Filip Iorgulescu, Cosmin Octavian Cepoi and Aurora Dina Manolache

MPRA Paper from University Library of Munich, Germany

Abstract: This study investigates the relationship between risk aversion, financial literacy, and investment preferences of young adults in higher education in Romania. For this purpose, we conducted a survey that measured the basic, advanced and overall financial literacy, risk aversion, and parental financial behaviours. We had 479 respondents and a similar number of useable surveys. Resorting to OLS and IV econometric methods, we show that financial literacy, regardless of its level, contributes to reducing risk aversion quantified by the risk premium. Moreover, positive financial behaviours of parents also decrease the risk aversion. This finding is invalid in the case of a self-assessed risk tolerance. We also found that young adults' investment preferences are influenced by the self-assessed risk tolerance and not by the risk aversion. However, financial literacy increases the probability of young adults to select bonds or funds as investment options, but does not have a statistically significant influence on the selection of stocks, which is mainly driven by the self-assessed risk profile as well as bank deposits.

Keywords: financial literacy; risk aversion; risk premium; investment choices; survey methods (search for similar items in EconPapers)
JEL-codes: C83 G11 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-fle, nep-isf, nep-tra and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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