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

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  • Sprenger, Julia

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.

Suggested Citation

  • Sprenger, Julia, 2016. "Naïve advice in financial decision making: Hidden costs of a free offer," Ruhr Economic Papers 656, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:656
    DOI: 10.4419/86788762
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial literacy; financial decision making; experiment; naïve advice;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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