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Does financial literacy alleviate risk attitude and risk behavior inconsistency?

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  • Korkmaz, Aslihan Gizem
  • Yin, Zhichao
  • Yue, Pengpeng
  • Zhou, Haigang

Abstract

This study investigates the relationship between risk preference and risk behavior using the China Household Finance Survey (CHFS). Empirical results suggest the existence of an inconsistency between risk preference and risk behavior; however, financial literacy affects this inconsistency. Financial literacy works through two channels. First, it can decrease the inconsistency between risk propensity and risk behavior. Second, it can encourage risk-taking behavior. The results also show that the heterogeneity in the risk sensitivity of households leads to different outcomes. Namely, financial literacy increases the inconsistency for the risk-averse and decreases it for the risk-seeking by increasing risk-taking behavior.

Suggested Citation

  • Korkmaz, Aslihan Gizem & Yin, Zhichao & Yue, Pengpeng & Zhou, Haigang, 2021. "Does financial literacy alleviate risk attitude and risk behavior inconsistency?," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 293-310.
    • Handle: RePEc:eee:reveco:v:74:y:2021:i:c:p:293-310
    DOI: 10.1016/j.iref.2021.03.002
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    7. Paulo Pereira Silva & Victor Mendes, 2023. "Education and financial mistakes: The case of avoidable trading fees in stock markets," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 22(2), pages 173-202, May.
    8. Jun Zhou & Zhichao Yin & Pengpeng Yue, 2022. "The impact of access to credit on energy efficiency," Papers 2211.08871, arXiv.org.
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    More about this item

    Keywords

    Financial literacy; Risk preference; Risk behavior; Risk propensity; Inconsistency;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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