Abstract
This paper investigates the combined effect of financial attention and financial literacy on investors’ performance. Our empirical analysis, based on a large and unique broker- age dataset, suggests that highly literate investors benefit by paying financial attention, whereas attention can be counterproductive for investors with low financial literacy. More- over, when investors, either highly or lowly literate, are overconfident about their financial literacy, the impact of financial attention on their performance is reinforced.
“Does Confidence Matter? The Good Side of (Over)confidence” Under review for JBF. Available at: SSRN
Abstract
This paper investigates whether highly literate investors are more likely to claim trading experience in complex financial products and achieve higher stock (risk-adjusted) returns if they are (over)confident in their financial literacy. Using MiFID questionnaire scores and a brokerage dataset, we rank investors’ financial literacy and measure overconfidence as the difference between subjective and objective financial literacy. Our results suggest that highly literate investors who are (over)confident in their financial literacy report with higher probability trading experience in complex financial products. Furthermore, we find that highly literate investors attain superior stock (risk-adjusted) returns as a consequence of their (over)confidence.
“Disposition Effect and Overconfident Investors” Under review for JBEF. Available at: SSRN
Abstract
Using a novel brokerage dataset covering individual investors’ answers to the MiFID questionnaire and trading data, we investigate the relationship between overconfidence, interpreted as the overestimation of own financial literacy, and the disposition effect. We test two hypotheses: overconfidence reduces the asymmetry between the proportion of gains and losses realized (reducing the severity of the disposition effect); the attenuation of the disposition effect is effectively driven by overconfidence (the psychological channel) and not by the higher turnover (the mechanical channel). Our findings support our hypotheses: investors who overestimate their financial literacy (overconfident investors) are less prone to the disposition effect.
“Guessing in MiFID Tests, Financial Literacy and Investors Trading Behavior", working paper.
Abstract
This paper examines the link between investors financial knowledge and trading behavior by analyzing retake patterns in the Markets in Financial Instruments Directive (MiFID) test.
We categorize investors who fill in the MiFID test multiple times into two distinct groups based on their scoring trajectories across multiple attempts: "guesser" investors, who exhibit inconsistent performance in the test, with initial scores exceeding subsequent results, and "improver" investors, who demonstrate a progressive improvement in their scores over attempts. We find that "guesser" investors tend to trade more, yet consistently achieving lower returns compared to their "improver" counterparts.
These results suggest that a "guessing" attitude to financial assessments may indicate, not only a lack of genuine financial literacy, but possibly overconfidence, which leads to suboptimal investment decisions.
