Measuring the Financial Sophistication of Households
This paper constructs an index of financial sophistication that, in comprehensive data on Swedish households, best explains a set of three investment mistakes: underdiversification, risky share inertia, and the tendency to sell winning stocks and hold losing stocks (the disposition effect). The index of financial sophistication increases strongly with financial wealth and household size, and to a lesser extent with education and proxies for financial experience. The index is strongly positively correlated with the share of risky assets held by a household.
We thank Statistics Sweden for providing the data. This material is based upon work supported by the Agence Nationale de la Recherche under a Chaire d'Excellence to Calvet, BFI under a Research Grant to Sodini, the HEC Foundation, the National Science Foundation under Grant No. 0214061 to Campbell, Riksbank, and the Wallander and Hedelius Foundation. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Measuring the Financial Sophistication of Households," American Economic Review, American Economic Association, vol. 99(2), pages 393-98, May. citation courtesy of