Felix

Does financial literacy affect the diversification loss within stock portfolios of a household in the US? 🔗

• First thoughts:
  • Very interesting topic! The effects of financial literacy can be very far-reaching, and diversification is a primary determinant of portfolio returns.
  • Financial literacy is of course correlated with a lot of other factors. For example, it might in general be related to educational level, age, or even the kind of job you do. It is vital to control for these factors in order to find out whether financial literacy is the real cause of diversification loss, or whether there might be different factors correlated with both fin. literacy and diversification loss.
  • Important to distinguish between financial literacy and education in general.

Data source 🔗

• The US Consumer Finance survey is not a one-off survey

• Do you know if you can follow subjects through time?

• If so, you can rely on intra-subject variation w.r.t. financial literacy, and see if a change in financial literacy leads to a change in diversification, effectively neutralizing all individual-specific factors

  • This would be a panel (fixed-effects) specification
  • The advantage is that individual effects that remain constant over time are absorbed by the fixed effects, so it would make your analysis more reliable.

• Could it also be possible to exploit factors that serve as an exogenous variation to financial literacy? For example, a shock in GDP in an area might influence education, which influences financial literacy. This could potentially be used as an instrument

Other questions 🔗

• Are there any other variables which you would want to know the effect of?
• Do you think there is a possibility of a more complex chain of causality? For example, could financial literacy influence the decision to employ certain brokers/advisors, who then either minimize diversification loss or not?
  • Do you think there are perspectives to get some data about this?