Risk Taking Behaviour and Diversification Strategies: Do Financial Literacy and Financial Education Play a Role?

This study investigates whether financial education and financial literacy influence the risk taking of non-professional investors and the diversification strategies they pursue. To this purpose, we submitted a questionnaire to 711 US residents. Our results show that financial education prevents financial illiteracy and changes the investment process of investors. On the other hand, financial literacy, measured according to the synthetic metric introduced by Lusardi and Mitchell, does not influence risk taking. Financial education indirectly exerts its influence also on a simple diversification behaviour, the so-called naive diversification, pursued equally splitting wealth among investment classes. In fact, whereas for uneducated investors there is no relationship between risk diversification strategies with both financial literacy and the main investor features, for educated investors financial literacy fosters such diversification behaviour. These results have important policy implications showing that financial education can trigger relevant changes in the investment patterns of investors. Our study introduces a series of novelties. First, we focus on how financial education and financial literacy simultaneously affect the investment process of investors. Moreover, we attempt to disentangle their effects on the risk taking dimension and diversification strategies, which are the most effective way to contain the potentially disruptive effects of risks taken.

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