Naïve advice in financial decision making: Hidden costs of a free offer

Julia Sprenger

No 656, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: The current study examines individual decision making in the field of personal finance. A laboratory experiment investigates the way naïve advice influences the decisionmaking process. When advice is offered on demand, participants prefer expert over naïve advice. Although naïve advice is only half the price of expert advice, demand for naïve advice is negligible. When naïve advice is given unsolicited, however, it has nevertheless a strong impact on the decision process by lowering engagement in information acquisition and promoting a passive adoption of the recommended option. While high levels of financial literacy buffer this effect, issuing a warning does not. In case compliance with naïve advice leads to a low decision quality and the saving in information acquisition costs does not make up for this effect, the free offer of naïve advice produces financial losses. This can be interpreted as hidden costs of free naïve advice resulting from a switch in information strategy. People with low financial literacy are most vulnerable to this effect.

Keywords: Financial literacy; financial decision making; experiment; naïve advice (search for similar items in EconPapers)
JEL-codes: C91 D83 G02 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-exp and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:656

DOI: 10.4419/86788762

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