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The effect of financial literacy on long-term recognition and short-term trade in mutual funds: Evidence from Japan

Author

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  • Aman, Hiroyuki
  • Motonishi, Taizo
  • Ogawa, Kazuhito
  • Omori, Kozo

Abstract

We explore how financial literacy affects mutual fund investments through unique survey data from a broad spectrum of Japanese households. Our evidence reveals the dual effects of literacy on investments over long and short horizons. While the acquisition of financial knowledge promotes long-term investment in mutual funds, it also has the side effect of encouraging short-term investment. Specifically, people with high financial literacy share a fundamental recognition that mutual funds are suitable for long-term wealth creation. However, highly literate people intend to sell mutual funds immediately after short-term price appreciation, which could lead to frequent trading turnover. This is consistent with the knowledge bias effect whereby knowledgeable people falsely react to information, contrary to long-term investments.

Suggested Citation

  • Aman, Hiroyuki & Motonishi, Taizo & Ogawa, Kazuhito & Omori, Kozo, 2024. "The effect of financial literacy on long-term recognition and short-term trade in mutual funds: Evidence from Japan," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 762-783.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pb:p:762-783
    DOI: 10.1016/j.iref.2023.10.006
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