Abstract
This paper investigates the combined effect of financial attention and financial literacy on investors' performance.
Our empirical analysis, based on a large brokerage dataset, reveals a striking asymmetry driven by investors' financial literacy: higher financial attention creates a significant decline in performance for less literate retail clients, whereas it serves as a value-generating tool for highly literate individuals.
Financial literacy acts as the cognitive filter required to convert raw attention into productive financial insights.
Furthermore, the performance penalty of raw attention seems to be significantly amplified for male investors; whereas advancing age systematically increases returns. Crucially, we document a relevant risk monitoring channel: while underdiversified portfolios hurts returns, intense financial attention serves as an essential tool for investors with more concentrated portfolios.
“Does Confidence Matter? The Good Side of (Over)confidence” working paper. Available at: SSRN
Abstract
This paper investigates whether highly literate investors are more likely to claim trading experience in complex financial products and achieve higher stock (risk-adjusted) returns if they are (over)confident in their financial literacy. Using MiFID questionnaire scores and a brokerage dataset, we rank investors’ financial literacy and measure overconfidence as the difference between subjective and objective financial literacy. Our results suggest that highly literate investors who are (over)confident in their financial literacy report with higher probability trading experience in complex financial products. Furthermore, we find that highly literate investors attain superior stock (risk-adjusted) returns as a consequence of their (over)confidence.
“Disposition Effect and Overconfident Investors” Available at: SSRN
Abstract
Using a novel brokerage dataset covering individual investors’ answers to the MiFID questionnaire and trading data, we investigate the relationship between overconfidence, interpreted as the overestimation of own financial literacy, and the disposition effect. We test two hypotheses: overconfidence reduces the asymmetry between the proportion of gains and losses realized (reducing the severity of the disposition effect); the attenuation of the disposition effect is effectively driven by overconfidence (the psychological channel) and not by the higher turnover (the mechanical channel). Our findings support our hypotheses: investors who overestimate their financial literacy (overconfident investors) are less prone to the disposition effect.
“Guessing in MiFID Tests, Financial Literacy and Investors Trading Behavior", working paper EDUFIN. Available at: Comitato di Educazione Finanziaria.
Abstract
This paper examines the link between investors financial knowledge and trading behavior by analyzing retake patterns in the Markets in Financial Instruments Directive (MiFID) test.
We categorize investors who fill in the MiFID test multiple times into two distinct groups based on their scoring trajectories across multiple attempts: "guesser" investors, who exhibit inconsistent performance in the test, with initial scores exceeding subsequent results, and "improver" investors, who demonstrate a progressive improvement in their scores over attempts. We find that "guesser" investors tend to trade more, yet consistently achieving lower returns compared to their "improver" counterparts.
These results suggest that a "guessing" attitude to financial assessments may indicate, not only a lack of genuine financial literacy, but possibly overconfidence, which leads to suboptimal investment decisions.
