IDEAS home Printed from https://ideas.repec.org/p/hhs/kthrec/2019_009.html
   My bibliography  Save this paper

The impact of financial literacy and financial interest on risk tolerance

Author

Listed:
  • Hermansson, Cecilia

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

  • Jonsson, Sara

    (Stockholm University)

Abstract

We investigate and compare the effects of financial literacy and financial interest on risk tolerance, evaluating not only at the means, but also at the whole distribution. We use a unique sample of 12,156 Swedish bank customers combining bank-register data with survey data. Results show that both financial literacy and financial interest are associated with higher risk tolerance. They further show that the impact of financial interest is significantly higher than the impact of financial literacy. Differences are also observed across the distribution. Quantile regressions show that financial interest has its greatest association at the medium-to-high range of risk tolerance, whereas financial literacy shows its greatest association at the lower range of risk tolerance. Findings contribute to the literature on risk tolerance, specifically pointing to the relevance of the noncognitive trait, interest, to individuals’ risk tolerance.

Suggested Citation

  • Hermansson, Cecilia & Jonsson, Sara, 2019. "The impact of financial literacy and financial interest on risk tolerance," Working Paper Series 19/9, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    • Handle: RePEc:hhs:kthrec:2019_009
    as

    Download full text from publisher

    File URL: http://www.diva-portal.org/smash/record.jsf?pid=diva2:1370914
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Anna Dreber & David Rand & Nils Wernerfelt & Justin Garcia & Miguel Vilar & J. Lum & Richard Zeckhauser, 2011. "Dopamine and risk choices in different domains: Findings among serious tournament bridge players," Journal of Risk and Uncertainty, Springer, vol. 43(1), pages 19-38, August.
    2. Annamaria Lusardi & Daniel Schneider & Peter Tufano, 2011. "Financially Fragile Households: Evidence and Implications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 83-150.
    3. Cesarini, David & Johannesson, Magnus & Lichtenstein, Paul & Sandewall, Örjan & Wallace, Björn, 2008. "Is Financial Risk-Taking Behavior Genetically Transmitted?," Working Paper Series 765, Research Institute of Industrial Economics.
    4. Anderson, Anders & Baker, Forest & Robinson, David T., 2017. "Precautionary savings, retirement planning and misperceptions of financial literacy," Journal of Financial Economics, Elsevier, vol. 126(2), pages 383-398.
    5. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob, 2011. "Financial literacy and stock market participation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 449-472, August.
    6. Bonsang, Eric & Dohmen, Thomas, 2015. "Risk attitude and cognitive aging," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 112-126.
    7. Menkhoff, Lukas & Sakha, Sahra, 2017. "Estimating risky behavior with multiple-item risk measures," Journal of Economic Psychology, Elsevier, vol. 59(C), pages 59-86.
    8. Annamaria Lusardi, 2008. "Financial Literacy: An Essential Tool for Informed Consumer Choice?," NFI Working Papers 2008-WP-13, Indiana State University, Scott College of Business, Networks Financial Institute.
    9. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2011. "Individual Risk Attitudes: Measurement, Determinants, And Behavioral Consequences," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 522-550, June.
    10. Feng, Xiangnan & Lu, Bin & Song, Xinyuan & Ma, Shuang, 2019. "Financial literacy and household finances: A Bayesian two-part latent variable modeling approach," Journal of Empirical Finance, Elsevier, vol. 51(C), pages 119-137.
    11. Conlin, Andrew & Kyröläinen, Petri & Kaakinen, Marika & Järvelin, Marjo-Riitta & Perttunen, Jukka & Svento, Rauli, 2015. "Personality traits and stock market participation," Journal of Empirical Finance, Elsevier, vol. 33(C), pages 34-50.
    12. Almenberg, Johan & Dreber, Anna, 2015. "Gender, stock market participation and financial literacy," Economics Letters, Elsevier, vol. 137(C), pages 140-142.
    13. Eckel, Catherine C. & Grossman, Philip J., 2008. "Men, Women and Risk Aversion: Experimental Evidence," Handbook of Experimental Economics Results, in: Charles R. Plott & Vernon L. Smith (ed.), Handbook of Experimental Economics Results, edition 1, volume 1, chapter 113, pages 1061-1073, Elsevier.
    14. Kramer, Marc M., 2016. "Financial literacy, confidence and financial advice seeking," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 198-217.
    15. Hermansson, Cecilia, 2018. "Can self-assessed financial risk measures explain and predict bank customers’ objective financial risk?," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 226-240.
    16. Fisher, Patti J. & Yao, Rui, 2017. "Gender differences in financial risk tolerance," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 191-202.
    17. Schooley, Diane K. & Worden, Debra Drecnik, 1996. "Risk aversion measures: comparing attitudes and asset allocation," Financial Services Review, Elsevier, vol. 5(2), pages 87-99.
    18. Dimmock, Stephen G. & Kouwenberg, Roy & Mitchell, Olivia S. & Peijnenburg, Kim, 2016. "Ambiguity aversion and household portfolio choice puzzles: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 119(3), pages 559-577.
    19. Grable, John & Lytton, Ruth H., 1999. "Financial risk tolerance revisited: the development of a risk assessment instrument," Financial Services Review, Elsevier, vol. 8(3), pages 163-181.
    20. Annamaria Lusardi, 2012. "Numeracy, financial literacy, and financial decision-making," NBER Working Papers 17821, National Bureau of Economic Research, Inc.
    21. Sandra Braunstein & Carolyn Welch, 2002. "Financial literacy: an overview of practice, research, and policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 88(Nov), pages 445-457, November.
    22. Bucciol, Alessandro & Miniaci, Raffaele & Pastorello, Sergio, 2017. "Return expectations and risk aversion heterogeneity in household portfolios," Journal of Empirical Finance, Elsevier, vol. 40(C), pages 201-219.
    23. Menkhoff, Lukas & Sakha, Sahra, 2014. "Multiple-item risk measures," Kiel Working Papers 1980, Kiel Institute for the World Economy (IfW Kiel).
    24. Bannier, Christina E. & Neubert, Milena, 2016. "Gender differences in financial risk taking: The role of financial literacy and risk tolerance," Economics Letters, Elsevier, vol. 145(C), pages 130-135.
    25. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
    26. Heath, Chip & Tversky, Amos, 1991. "Preference and Belief: Ambiguity and Competence in Choice under Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 5-28, January.
    27. Matthias Gysler & Jamie Kruse & Renate Schubert, 2002. "Ambiguity and Gender Differences in Financial Decision Making: An Experimental Examination of Competence and Confidence Effects," CER-ETH Economics working paper series 02/23, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    28. Rachel Croson & Uri Gneezy, 2009. "Gender Differences in Preferences," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 448-474, June.
    29. Gunnarsson, Jonas & Wahlund, Richard, 1997. "Household financial strategies in Sweden: An exploratory study," Journal of Economic Psychology, Elsevier, vol. 18(2-3), pages 201-233, April.
    30. Graham Loomes & Ganna Pogrebna, 2014. "Measuring Individual Risk Attitudes when Preferences are Imprecise," Economic Journal, Royal Economic Society, vol. 0(576), pages 569-593, May.
    31. Charness, Gary & Gneezy, Uri, 2012. "Strong Evidence for Gender Differences in Risk Taking," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 50-58.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nancy Neoyame Chabaefe & Abubaker Qutieshat, 2024. "Financial Literacy, Financial Education and Financial Experience: Conceptual Framework," International Journal of Economics and Financial Issues, Econjournals, vol. 14(4), pages 44-55, July.
    2. Carlsson Hauff, Jeanette & Hermansson, Cecilia, 2023. "“Buy him some Tesla stocks for his baptism”: Gender differences among young savers," Working Paper Series 23/12, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance, revised 19 Sep 2024.
    3. Mohammed Abdullah Ammer & Theyazn H. H. Aldhyani, 2022. "An Investigation into the Determinants of Investment Awareness: Evidence from the Young Saudi Generation," Sustainability, MDPI, vol. 14(20), pages 1-25, October.
    4. S. Ananda & Raghavendra Prasanna Kumar & Tamanna Dalwai, 2024. "Impact of financial literacy on savings behavior: the moderation role of risk aversion and financial confidence," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 29(3), pages 843-854, September.
    5. AlSuwaidi, Reem Ahmed & Mertzanis, Charilaos, 2024. "Financial literacy and FinTech market growth around the world," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    6. Nur Alya Afiqah Binti Mahat & Wei-Theng Lau, 2023. "Financial Literacy, Experience, Risk Tolerance and Investment Behavior: Observations during Pandemic," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(10), pages 558-573, October.
    7. Stoian, Andreea & Vintila, Nicoleta & Iorgulescu, Filip & Cepoi, Cosmin Octavian & Dina Manolache, Aurora, 2021. "How Risk Aversion and Financial Literacy Shape Young Adults’ Investment Preferences," MPRA Paper 109755, University Library of Munich, Germany.
    8. Weiss-Cohen, Leonardo & Newall, Philip Warren Stirling & Ranyard, Rob & Ayton, Peter & Clacher, Iain, 2023. "Revalidating Fernandes et al.’s 2014 financial literacy scale in response to ongoing legislative and behavioral changes," OSF Preprints 493x7, Center for Open Science.
    9. Kumar, Satish & Rao, Sandeep & Goyal, Kirti & Goyal, Nisha, 2022. "Journal of Behavioral and Experimental Finance: A bibliometric overview," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    10. Carton, F.L. & Xiong, H. & McCarthy, J.B., 2022. "Drivers of financial well-being in socio-economic deprived populations," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    11. Paula Sarabando & Roge rio Matias & Pedro Vasconcelos & Tiago Miguel, 2023. "Financial literacy of Portuguese undergraduate students in polytechnics: does the area of the course influence financial literacy?," Journal of Economic Analysis, Anser Press, vol. 2(2), pages 96-113, April.
    12. Plotkina, Daria & Hoffmann, Arvid O.I. & Roger, Patrick & D’Hondt, Catherine, 2024. "Gender vs. personality: The role of masculinity in explaining cognitive style," LIDAM Reprints LFIN 2024010, Université catholique de Louvain, Louvain Finance (LFIN).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hermansson, Cecilia, 2018. "Can self-assessed financial risk measures explain and predict bank customers’ objective financial risk?," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 226-240.
    2. Baeckström, Ylva & Marsh, Ian W. & Silvester, Joanne, 2021. "Financial advice and gender: Wealthy individual investors in the UK," Journal of Corporate Finance, Elsevier, vol. 71(C).
    3. Brooks, Chris & Sangiorgi, Ivan & Hillenbrand, Carola & Money, Kevin, 2019. "Experience wears the trousers: Exploring gender and attitude to financial risk," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 483-515.
    4. Hermansson, Cecilia & Jonsson, Sara & Liu, Lu, 2022. "The medium is the message: Learning channels, financial literacy, and stock market participation," International Review of Financial Analysis, Elsevier, vol. 79(C).
    5. Bannier, Christina E. & Schwarz, Milena, 2018. "Gender- and education-related effects of financial literacy and confidence on financial wealth," Journal of Economic Psychology, Elsevier, vol. 67(C), pages 66-86.
    6. Sangita Choudhary & Mohit Yadav & Anugamini Priya Srivastava, 2024. "Cognitive Biases Among Millennial Indian Investors: Do Personality and Demographic Factors Matter?," FIIB Business Review, , vol. 13(1), pages 106-117, January.
    7. Almenberg, Johan & Dreber, Anna, 2015. "Gender, stock market participation and financial literacy," Economics Letters, Elsevier, vol. 137(C), pages 140-142.
    8. Jürg Hari & Elisabeth Pirsch & Heike Rawitzer, 2018. "Women are scaredy-cats and men are conquerors?," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 23(2), pages 128-139, June.
    9. Ranganathan, Kavitha & Lejarraga, Tomás, 2021. "Elicitation of risk preferences through satisficing," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    10. Bannier, Christina E. & Neubert, Milena, 2016. "Gender differences in financial risk taking: The role of financial literacy and risk tolerance," Economics Letters, Elsevier, vol. 145(C), pages 130-135.
    11. Cupák, Andrej & Fessler, Pirmin & Schneebaum, Alyssa, 2021. "Gender differences in risky asset behavior: The importance of self-confidence and financial literacy," Finance Research Letters, Elsevier, vol. 42(C).
    12. Fey, Jan-Christian & Lerbs, Oliver & Schmidt, Carolin & Weber, Martin, 2020. "Risk attitude and capital market participation: Is there a gender investment gap in Germany?," ZEW Discussion Papers 20-080, ZEW - Leibniz Centre for European Economic Research.
    13. Yating Chuang & John Chung-En Liu, 2020. "Who wears a mask? Gender differences in risk behaviors in the COVID-19 early days in Taiwan," Economics Bulletin, AccessEcon, vol. 40(4), pages 2619-2627.
    14. Baeckström, Ylva & Marsh, Ian W. & Silvester, Joanne, 2021. "Variations in investment advice provision: A study of financial advisors of millionaire investors," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 716-735.
    15. Eunmi Kim & Sejoong Lee & Joonwhan David Lee, 2018. "Reaching Sustainable Financial Health: Gender Differences in Risk-Taking Patterns of Financially Excluded People," Sustainability, MDPI, vol. 10(4), pages 1-15, April.
    16. Tani, Massimiliano & Wen, Xin & Cheng, Zhiming, 2023. "Daughters, Savings and Household Finances," IZA Discussion Papers 16440, Institute of Labor Economics (IZA).
    17. Grohmann, Antonia & Hübler, Olaf & Kouwenberg, Roy & Menkhoff, Lukas, 2021. "Financial literacy: Thai middle-class women do not lag behind," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    18. Filippin, Antonio & Crosetto, Paolo, 2014. "A Reconsideration of Gender Differences in Risk Attitudes," IZA Discussion Papers 8184, Institute of Labor Economics (IZA).
    19. Tabea Bucher-Koenen & Rob Alessie & Annamaria Lusardi & Maarten van Rooij, 2021. "Fearless Woman. Financial Literacy and Stock Market Participation," Working Papers 708, DNB.
    20. Crosetto, P. & Filippin, A., 2017. "Safe options induce gender differences in risk attitudes," Working Papers 2017-05, Grenoble Applied Economics Laboratory (GAEL).

    More about this item

    Keywords

    Financial risk tolerance; financial literacy; financial interest; quantile regression;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:kthrec:2019_009. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Cecilia Hermansson (email available below). General contact details of provider: https://edirc.repec.org/data/ifkthse.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.