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Financial literacy, personal characteristics and asset allocation strategies
Student number: s2750449 Name: Elody Hutten Study program: MSc Finance First supervisor: Bert Kramer
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Abstract
The aim of the current study was to investigate the effect of financial literacy, attitude towards stock market participation, subjective norm with respect to the stock market and the perceived ability of the investor to invest in the stock market on asset allocation strategies. Data was collected using an online survey that measured the aforementioned factors and presented the participants with some asset allocation scenarios. The results indicate a significant effect of the aforementioned factors on (the degree of) stock market participation and the consistency of the asset allocation strategy.
1. Introduction
Currently, there is a trend whereby the responsibilities with respect to social security and pension planning are shifting from governments and employers towards private individuals. An illustration of this process is the growing number of self-employed individuals without personnel (sole proprietorship), according to the Dutch “Centraal Bureau voor Statistiek”, the number of one person businesses has increased from 330.000 in 1996 to 800.000 in 2014 (CBS, 2014). Self-employed people are responsible for their own pension planning while people working for an employer often benefit from a pension plan arranged by the employer. Shockingly, however, almost half of the one person businesses fail to engage in pension planning (AD, 2015). Obviously, this lack of pension planning among self-employed individuals could have severe consequences for their future income but it could also have a negative effect on the economy.
1.1 Literature review
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Regardless of the fact that it has been observed that financial literacy is associated with better investment decisions, pension planning and stock market participation (Rooij, Lusardi & Alessie, 2011; Xu & Zia, 2012), it remains relatively unclear, however, how financial literacy actually influences investment decisions of individual investors. Put differently: what causes financially literate investors to do better than less financially literate individuals in the context of personal finance? Another aim of the current study is to answer just that by investigating the effect of the determinants of planned behavior on the asset allocation strategies used by individual investors.
The research question of the current study therefore becomes:
“What is the influence of financial literacy and the determinants of planned behavior on asset allocation strategies?”
1.2 Methodology
The aim of the current study is to answer the aforementioned research question by conducting an online questionnaire aimed to measure financial literacy in line with Rooij, Lusardi and Alessie (2011), the three determinants of planned behavior as defined by Azjen (1988) and asset allocation strategies based on the study by Benartzi and Thaler (2001). In total 133 participants completed the questionnaire.
The data obtained from these surveys will be analyzed using either an OLS regression model or a binary logistic regression model. The OLS regression model was used to model variables predicting the asset allocation strategy (percentage allocated to stocks) in a number of scenarios and the consistency of the asset allocation across the scenarios. The logistic binary regression analysis was used to model variables predicting whether participants actually invested in stocks in real life.
1.3 Main results
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a positive effect on the percentage allocated to stocks. Further, advanced financial literacy had a positive effect on the consistency of the asset allocation across the different scenarios. Both the determinants of planned behavior and financial literacy were found to have a positive effect on actual stock market participation in real life.
1.4 Conclusion
Apparently, the model of Azjen (1988) with respect to planned behavior is able to predict stock market participation. A more positive attitude towards stock market participation, the perception that significant others have a positive attitude towards stock market participation and a positive perception of one’s ability to invest in stocks all increase the likelihood that someone invests in stocks. Further, the aforementioned factors have a positive effect on the percentage allocated to stocks.
1.5 Reading guide
The second chapter, the literature review, will discuss relevant studies with respect to financial literacy and the determinants of planned behavior. The section will conclude by providing the research question and the corresponding hypotheses. After the literature review, the methodology used in the current study will be discussed including a description of the questionnaire and the variables. Finally, the results of the current study will be presented as well as the most important conclusions. The thesis will conclude by discussion the conclusions of the current study.
2. Literature review
2.1 The prevalence of financial literacy
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relatively low income, minority and either young or old respondents compared to the best performing subgroup. Lusardi and Mitchell (2007) conducted a similar study with respect to the prevalence of financial literacy. Their sample included approximately 1700 respondents within the range 51-56 years old. The results revealed that more than 80% of the participants were able to do simple calculations with respect to percentages. However, a little over half of the participants were not able to answer the following question: “If 5 people all have the winning number in the lottery and the prize is 2 million dollars, how much will each
of them get?” and over 80% did not know how to calculate the amount of interest earned over two time periods. This latter result is quite shocking and could have disastrous consequences with respect to the personal finance decision of people. Lusardi and Mitchell (2007) also discriminated between different demographic characteristic within their sample and found that an increase in education level was associated with an increase in financial literacy and that Caucasian participants outperformed both Afro-Americans and Hispanics. Thereby confirming the results obtained by Hilgert and Hogarth (2002) that both minorities and less educated people possess less financial knowledge.
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Clearly, the lack of knowledge with respect to basic financial concepts could have terrible consequences when people have to make personal financial decisions. Especially, when these findings are considered in relation to the trend that the responsibilities regarding social security and pension are shifting more towards private individuals and away from governments and employers, the effects of financial illiteracy could pose a real threat to the financial security of individuals. The next section will explore the (possible) effects of financial literacy on investment decisions of individual investors.
2.2 The (possible) effects of financial literacy on investment decisions
The world-wide review by Xu and Zia (2012) also investigated other correlates of financial literacy. They found that, in high-income countries, financial literacy is associated with retirement planning and more sophisticated investment behavior. Apparently, people with a relatively high degree of financial literacy are more engaged in planning their retirement and are also better able to do so compared to less financially literate individuals.
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ownership. This result provides evidence with respect to a positive relationship between financial literacy and stock ownership. The aforementioned authors, Rooij, Lusardi and Alessie (2012), later conducted a similar study. The results of this study further confirmed their earlier results, namely that financial literacy is positively correlated with stock market participation and retirement planning. The amount of wealth and income of the participants was controlled for; therefore the aforementioned relationship cannot merely be explained by the fact that more financially literate individuals are also wealthier which might make it more likely that they invest in the stock market.
A more recent study by Cox, Brounen and Neuteboom (2015) investigated the relationship between financial literacy and the choice with respect to mortgage types. They found that non-traditional, alternative mortgages (like amortizing mortgages) were chosen by households that were wealthier, older and more sophisticated. It was hypothesized that other households might refrain from engaging in such a mortgage since these households have less understanding of the risks and benefits associated with these financial products. This study could indicate that people are reluctant to buy or invest in financial products they do not fully understand. A more general study with respect to household investment decisions was conducted by Campbell (2006). He found that less educated and less wealthy households made more investment mistakes compared to more educated and wealthy households. Further, the households that made these bad investment mistakes were also very likely not to invest in risky assets. These results might indicate that less (financially) educated investors are also reluctant to invest in risky assets at all.
These studies clearly indicate that financial illiteracy is relatively common among high-income countries (Hilgert & Hogarth, 2002; Xu & Zia, 2012) and further demonstrate that a lack of financial knowledge is associated with bad investment decisions, little stock market participation, reluctance to invest in risky assets or complex financial products and a lack of retirement planning compared to financial literate individuals (Campbell, 2006; Cox, Brounen & Neuteboom, 2015; Rooij, Lusardi & Alessie, 2011; Xu & Zia, 2012). These findings support the hypothesis that financial illiteracy causes less optimal financial decision making. More specifically, the current study proposes that financial literacy has a positive effect on the relative amount of assets allocated to stocks.
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A famous model by Azjen (1988) in the field of psychology is called the theory of planned behavior. This model aims to predict the occurrence of a certain behavior through the intention by an individual to conduct that behavior. According to Azjen (1988), the intention to conduct a certain behavior is influenced by four factors: attitudes toward the behavior, self-efficacy, the subjective norm and the intention to conduct certain behavior. An explanation with respect to these factors can be found below:
1. Behavioral attitude: the degree to which the results of a certain behavior are valued positively or negatively.
2. Subjective norm: a personal perception regarding the attitudes of significant others which respect to the outcome of certain behavior.
3. Self-efficacy (perceived behavioral control): a personal perception regarding the individual’s ability to perform a certain behavior.
4. Intention: an individual’s intention towards engaging in a certain behavior.
In conclusion, an individual’s behavioral attitude, the perceived subjective norm and perceived behavior control can be used to predict behavioral intention. Then, in turn, the intention to conduct certain behavior in combination with the perceived behavioral control can be used to predict actual behavior.
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Figure 1 The theory of planned behavior by Azjen (1988). The model predicts planned behavior through four factors: attitude towards a certain behavior, the subjective norm with respect to the behavior and the degree to which an individual perceives him or herself able to perform a certain behavior and the intention of an individual to conduct a certain behavior.
This model could also be applied to financial decision making. Like mentioned before, several studies have indicated that financial literacy is positively correlated with sound financial decision making. The current study proposes more specifically that financial literacy will have an influence on asset allocation strategies of individual investors. Since asset allocation strategies are to be considered as a form of planned behavior, the current study further proposes that the determinants of planned behavior (attitude, subjective norm and perceived behavioral control) will also influence asset allocation strategies.
A study by Hurd, Rooij and Winter (2011) found that investors’ expectations with respect to stock market returns was positively correlated with stock market participation. The current study proposes that these results might also hold with respect to an investors’ attitude towards the stock market in general. The second hypothesis, thus, becomes that a positive attitude towards the stock market in general has a positive effect on stock market participation.
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The degree of stock market participation might also be influenced by the attitude with respect to the stock market of significant others. A peer effect that has been found in the literature before, is the positive effect of stock market participation of significant others (community members like neighbors) on the stock market participation of an individual investor (Brown, Ivkovic, Smith & Weisbenner, 2008; Hong, Kubik & Stein, 2004). The current study hypothesizes that this peer effect might be caused by the fact that these significant others that participate in the stock market create a positive subjective norm with respect to the stock market. So, by creating a positive subjective norm with respect to stock market participation these peers have a positive influence on the stock market participation of individual investors.
H3: A positive subjective norm with respect to the stock market has a positive effect on stock market participation.
Finally, the current study proposes that (degree of) stock market participation will be influenced positively by an investor’s belief that he or she is able to invest in stocks. It seems logical that an investor that does not think that he or she is able to invest in the stock market will not invest in the stock market.
H4: Perceived behavioral control with respect to investing in the stock market has a positive effect on stock market participation.
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were also more invested in stocks compared to the situation whereby both funds combined contained more bonds. This indicates that investors do not determine their asset allocation based on the riskiness of the assets but rather across funds. By not basing their asset allocation on the risk profile of the asset classes included, the investor are at risk of exposing themselves to either too little or too much risk for their risk profile. The study by Benartzi and Thaler (2001) revealed that some investors engaged in an inconsistent asset allocation strategy. However, they do not provide a clear explanation with respect to the determinants that influence the use of an inconsistent asset allocation strategy. Like mentioned before, an individual’s financial literacy is associated with relatively good investment decisions, retirement planning and stock market participation. Therefore, it could be that individuals with a low degree of financial literacy are inclined to engage in inconsistent asset allocation strategies.
H5: Financial literacy has a positive effect on consistent asset allocations strategies.
The current study will investigate these hypotheses by answering the following research question:
“What is the influence of financial literacy and the determinants of planned behavior on the asset allocation strategies of individual investors?”
In order to be able to answer this question, the current study conducted an experimental research design. Participants were asked to answer 16 questions with respect to financial concepts in order to estimate their degree of financial literacy. Further, they were presented with some statements reflecting the determinants of planned behavior. Finally, they were presented with three scenarios which consisted of two funds across which participants were asked to (fictively) divide their wealth.
3. Methodology
3.1 Participants
The current study contains a sample of 133 participants of which 69,2% is male. The average
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vocational education, 24,1% higher vocational education and 65,4% academic education. Finally, 24,0% of the participants indicated that they actually invested in stocks at the moment.
3.2 Variables
Financial literacy will be measured in line with the study by Rooij, Lusardi and Alessie (2012). This means that financial literacy will be split up into two modules: basic financial knowledge and advanced financial knowledge. The first five question of the questionnaire are related to basic financial concepts (like compounding interest rates and the time value of money) and the remaining eleven are a reflection of the participants knowledge with respect to more advanced financial concepts (like the stock market, bonds and diversification). The questions are presented in Appendix A. The degree of both basic financial knowledge and advanced financial knowledge are expressed in terms of fractions. So, the degree of basic financial knowledge is defined as: (number of correctly answered basic questions / 5). The degree of advanced financial knowledge is defined as: (number of correctly answered advanced question / 11).
The three determinants of planned behavior in line with the model presented by Azjen (1988) that are measured by the questionnaire are: the participant’s attitude with respect to investing in the stock market, the subjective norm with respect to investing in the stock market as perceived by the participant and the participant’s perceived ability with respect to investing in stocks. These three determinants are measured using a single item per concept consisting of a statement. The participant could indicate to what degree he or she agreed with the statement using a five-point Likert scale (1 = completely agree, 2 = somewhat agree, 3 = neutral, 4 = somewhat disagree and 5 = completely disagree). Afterwards, the variables were rescaled in order to ease the interpretation of the regression analyses (so a score of 1 becomes “completely disagree” etc.).
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second scenario, the participant could allocate their assets over both the balanced fund and a fund consisting solely of bonds and in the third scenario, the participant could allocate their assets over both the balanced fund and a fund consisting solely of stocks. For these allocation scenarios, the percentage allocated to stocks will be calculated. Secondly, whether the participant actually invests in stocks in the real world was added as a categorical variable. In total, 32 of the 133 participants do invest in stocks. Thirdly, the consistency of the asset allocation strategy of participants will be measured. Consistency will be defined as a consistent allocation to stocks over the three scenarios. If the same allocation cannot be made due to the balanced fund, the closest allocation as possible will be used to compare the participant’s allocation to. Consistency will be measured as the absolute deviation in percentages with respect to the asset allocation strategies that are possible in situation two and three that most closely resemble their original asset allocation and the asset allocation that was actually chosen in situation two and three. The absolute deviation in percentages was chosen instead of the relative deviation (relative compared to the percentage allocated to stocks in the first scenario) to avoid a difference of 20%-points from being a higher inconsistency when the initial allocation to stocks is 10% compared to the situation whereby the initial allocation is 60%. So, when someone has an inconsistency of 0.15 (equal to an absolute deviation of 15%) and his initial allocation was 20 percent to stocks, he could have chosen an allocation to stocks in the next scenario of 5 or 35 percent. Due to the fact that it is assumed that participants did not have access to calculators, all inconsistencies of 0.1 or less are considered to be zero to prevent miscalculations from being seen as inconsistencies.
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Figure 2 The distribution of the participants across the different age groups.
The figure clearly reveals that the age of the participants is concentrated between approximately 20 till 25 years old. The three categories that were created are: category 1 = 18-22, category 2 = 23-39 and category 3 = 40 and higher. The distribution of the number of participants per age group can be found in figure 3. Category 1 contains 41 participants, category 2 contains 65 participants and the third group consists of 27 participants.
Figure 3 The number of participants per age category.
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Figure 4 The distribution of the participants across the different education levels.
Due to the fact that there are few people with a high school diploma and an intermediate vocational education level, both categories were merged into one. So, category 1 = “high school or intermediate vocational”, 2 = “higher vocational” and 3 = “academic”. In total, category 1 includes 15 participants, category 2 consists of 32 participants and category 3 contains 87 participants.
3.3 Data analysis
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The independent variables added to the regression analysis are: advanced financial literacy, attitude towards stock market participation, subjective norm towards stock market participation and the perceived behavioral control with respect to stock market participation. The control variables added to the regression model are: gender, age and education level.
AAS = α + β1 (AFL) + β2 (AT) + β3 (SN) + β4 (BC) + β5 (GE_1) + β6 (AGE_1) + β7 (AGE_2) + β8 (ED_1) + β9 (ED_2)
Asset allocation strategy (AAS) = percentage allocated to stocks/actual stock market participation/consitency
Attitude towards stock market participation (AT) = attitude based on a five point Likert scale Subjective norm towards stock market participaton (SN) = subjective norm on a five point Likert scale
Perceived behavioral control (BC) = perceived behavioral control on a five point Likert scale Gender (GE_1) = dummy variable “male” = 1
Age (AGE_1) = dummy variable ages 18-22 = 1 Age (AGE_2) = dummy variable ages 23-39 = 1
Education level (ED_1) = dummy variable “academic education” Education level (ED_2) = dummy variable “higher vocational education”
4. Results
4.1 Descriptive statistics
The descriptive statistics will consist of both a univariate and a bivariate, correlational analysis of the variables.
4.1.1 Financial literacy
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Figure 5 Percentage correct per item across all participants with respect to basic financial literacy.
From figure 5, it can be concluded that most items were answered correctly by the majority of the participants. In fact, all items were answered correctly more than 75% of the time. Three of the five items were even answered correctly above 90% of the time. Item four reveals a score of 77% which is somewhat less compared to the other items. Apparently, the participants are quite familiar with the basic financial concepts like interest rate (compounding) and the influence of the inflation rate. A concept that the participants found more difficult is the time value of money (item 4) although the score on this item is still relatively high. In total, the average percentage of correct answers across all the items of the basic financial literacy survey and all participants is 91,0%. Compared to the average score on the basic financial literacy questions of 78,7% found in the study by Rooij, Lusardi and Alessie (2011), the average score of the current study seems relatively high.
Figure 6 Percentage correct per item across all participants with respect to the advanced financial literacy questions.
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the bond market and the effect of interest rate changes on bond prices. Item 5, which is concerned with the longer term returns of stocks and bonds, also reveals a somewhat lower score compared to the overall results. Interestingly, participants are thus very well aware of the fact that the return on stocks is more volatile compared to bonds (item 6) but they are not aware of the fact that stocks offer a risk premium to compensate investors for this higher risk. Compared to the average score of 53,9% on the advanced financial literacy question by Rooij, Lusardi and Alessie (2011), the score of the current study of 72,9% is relatively high as well. The fact that both the score with respect to the basic financial concepts and the score on the advanced financial concepts is relatively high compared to the study by Rooij, Lusardi and Alessie (2011) can be explained by the fact that our sample contains relatively more highly educated participants compared to the study by Rooij, Lusardi and Alessie (2011).
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Table 1 Results of the summary statistics with respect to the scale variables included in the current study.
Variables Mean Median Standard
deviation Minimum Maximum N Basic financial literacy 0.91 1.00 0.15 0.20 1.00 133 Advanced financial literacy 0.73 0.81 0.24 0.00 1.00 133 Attitude 3.99 4.00 0.95 1.00 5.00 133 Subjective norm 3.53 4.00 1.00 1.00 5.00 133 Self-efficacy 3.80 4.00 1.15 1.00 5.00 133 Allocation to stocks (1) 0.49 0.50 0.21 0.10 1.00 133 Allocation to stocks (2) 0.34 0.35 0.12 0.00 0.50 133 Allocation to stocks (3) 0.67 0.65 0.13 0.50 1.00 133 Inconsistency (1) 0.15 0.00 0.22 0.00 1.00 133 Inconsistency (2) 0.18 0.20 0.19 0.00 0.90 133
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can be explained by the fact that people in such an age category do not have enough wealth to invest in the stock market. Having an academic education is positively correlated with basic financial literacy and perceived behavioral control with respect to stock market participation. So, higher educated individuals possess more basic financial knowledge and are more likely to perceive themselves as able to invest in the stock market compared to less educated people.
Further, it can be concluded that variables related to a similar concept were all positively correlated with each other. This indicates that, indeed, these variables measure the same concept. For example, the percentage allocated to stocks across all three scenarios is positively correlated with each other. The percentage allocated to stocks in the first scenario is also positively correlated with both attitude and self-efficacy. This means that the more positive the attitude towards stock market participation and the better able someone perceives themselves to invest in stocks, the higher the percentage allocated to stocks in the first scenario.
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Table 2 Pearson’s correlational table of all variables used in this study. A significance level of 5% was indicated by a single star (*) and a significance level of 1% was indicated by a double star (**).
6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
1. Gender (1=male) 0.27** 0.29** 0.23** 0.03 0.38** 0.15 0.15 0.06 0.22** -0.18* -0.17* 2. Age (1-22) 0.05 0.05 0.02 -0.06 -0.08 -0.07 -0.13 -0.06 -0.26** 0.00 -0.08
3. Age (23-39) -0.03 -0.07 -0.02 0.05 0.06 0.03 0.07 0.01 0.08 0.00 0.02
4. Educational level (HBO) -0.01 -0.06 0.04 0.05 -0.05 0.04 -0.03 0.14 0.05 0.11 0.14 5. Educational level (WO) 0.21* 0.15 0.08 0.12 0.19* 0.06 0.13 -0.09 0.08 -0.10 -0.16 6. Financial literacy (1) 1 0.43** 0.12 0.40 0.23** 0.02 0.13 -0.08 0.17* -0.20* -0.26** 7. Financial literacy (2) 1 0.43** 0.20* 0.43** -0.11 0.21* -0.28** 0.29** -0.37** -0.29**
8. Attitude 1 0.38** 0.48** 0.18* 0.35** 0.06 0.29** -0.12 -0.05
9. Subjective norm 1 0.30** 0.10 0.15 0.02 0.35** -0.05 -0.07
10. Self-efficacy 1 0.19* 0.36** -0.04 0.31** -0.19* -0.25**
11. Stock market participation (1) 1 0.58** 0.65** 0.15 0.10 -0.18*
12. Stock market participation (2) 1 0.19* 0.26** -0.43** -0.18*
13. Stock market participation (3) 1 -0.03 0.16 0.36**
14. Actual stock market participation (1=yes) 1 -0.23** -0.29**
15. Inconsistency (1) 1 0.24**
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Advanced financial literacy is positively correlated with the three concepts with respect to the theory of planned behavior. Respectively attitude, subjective norm and self-efficacy (perceived behavioral control). So, people with more advanced financial knowledge have a more positive attitude with respect to investing in the stock market and also believe that their significant others are positive with respect to investing in the stock market. Further, people with more advanced financial knowledge perceive themselves to be better able to invest in the stock market compared to people with less advanced financial knowledge. Advanced financial literacy is also positively correlated with the relative amount allocated to stocks in the second scenario and negatively correlated with the relative amount allocated to stocks in the third scenario. This means that people with more advanced financial literacy have a higher allocation to stocks in the scenario with the balanced fund and the bond fund compared to less financially literate individuals. This could indicate that people with advanced financial literacy do correct for the balanced fund compared to less financially literate individuals. The same reasoning can be applied to the third scenario. Indeed, advanced financial literacy is negatively correlated with inconsistency with respect to the asset allocation across scenarios. Apparently, people that have more advanced financial knowledge are more likely to invest a consistent relative amount to stocks. Finally, advanced financial literacy is positively correlated with actual stock market participation which indicates that people with more advanced financial knowledge are more likely to invest in the stock market compared to people with less advanced financial knowledge.
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allocated to stocks. Apparently, people that think that they are able to invest in the stock market are less likely to engage in inconsistent asset allocation strategies.
Interestingly, actual stock market participation was negatively correlated with inconsistency in the asset allocation strategy. This means that people that actually invest in stocks in real life are less likely to engage in inconsistent asset allocation strategies. These results could indicate that people that actually have experience with investing know that their asset allocation strategy should be consistent with their risk preferences. Therefore, these people are more likely to adjust their asset allocation between the funds offered during the current study in order to make sure that the riskiness of their asset allocation remains the same (or as close as possible).
4.2 Regression analysis
The results of the regression analyses conducted on the percentage allocated to stocks for the three scenarios presented during the experiment are presented in table 3, 4 and 5. Due to the fact that some of the independent variables revealed a relatively high correlation (see table 2) the regression analyses were conducted on a “trial-and-error” basis. This means that every possible combination of the variables was tested and only the combinations of variables whereby every variable in the model had a significant effect on the dependent variable are presented. The control variables that did not have a significant effect were also removed from the model.
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Table 3 Summary of the regression analysis for variables predicting the percentage allocated to stocks in the first scenario (N=133). All possible combinations of the variables were tested but only the models that solely contained significant variables are presented below.
Model 1 Model 2 Model3 Model4
Variable β SE β β SE β β SE β β SE β
Advanced financial literacy -0.19* 0.08 -0.20* 0.08
Attitude 0.04* 0.02 0.06** 0.02
Subjective norm
Perceived behavioral control 0.04* 0.02 0.05** 0.02
Constant 0.34** 0.36** 0.39** 0.44**
R2 0.02 0.03 0.07 0.08
*
p < 0.05 **p < 0.01
Table 4 Summary of the regression analysis for variables predicting the percentage allocated to stocks in the second scenario (N=133). All possible combinations of the variables were tested but only the models that solely contained significant variables are presented below.
Model 1 Model 2 Model3 Model4
Variable β SE β β SE β β SE β β SE β
Advanced financial literacy 0.11* 0.04
Attitude 0.05** 0.01 0.03* 0.01
Subjective norm
Perceived behavioral control 0.04** 0.01 0.03** 0.01
Constant 0.26** 0.16** 0.20** 0.12**
R2 0.04 0.12 0.12 0.16
*
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Table 5 Summary of the regression analysis for variables predicting the percentage allocated to stocks in the third scenario (N=133). All possible combinations of the variables were tested but only the models that solely contained significant variables are presented below.
Model 1 Model 2
Variable β SE β β SE β
Advanced financial literacy -0.16** 0.05 -0.21** 0.05
Attitude 0.03* 0.01
Subjective norm
Perceived behavioral control
Constant 0.78** 0.70**
R2 0.08 0.12
*
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Table 6 Summary of the logistic regression analysis for variables predicting whether participants actually invested in stocks in real life (N=133). All possible combinations of the variables were tested but only the models that solely contained significant variables are presented below.
Model 1 Model 2 Model 3 Model 4
Variable β SE β β SE β β SE β β SE β
Advanced financial literacy 4.00** 1.28
Attitude 1.00** 0.32
Subjective norm 1.08** 0.29
Perceived behavioral control 0.90** 0.27
Constant -4.29** -5.34** -5.25** -4.82**
χ2
13.63 13.30 19.13 15.86
*p < 0.05 **p < 0.01
Table 7 Summary of the logistic regression analysis for variables predicting whether participants actually invested in stocks in real life (N=133). All possible combination of the variables were tested but only the models that solely contained significant variables are presented below.
Model 1 Model 2 Model 3 Model 4 Model 5
Variable β SE β β SE β Β SE β β SE β β SE β
Advanced financial literacy 3.05* 1.37 4.46** 1.54 2.56* 1.26
Attitude 0.69* 0.33 0.80* 0.34
Subjective norm 1.15** 0.32 0.99** 0.31 0.94** 0.30
Perceived behavioral control 0.72* 0.29 0.72** 0.27
Constant -6.45** -9.04** -6.11** -8.30** -7.62**
χ2
19.17 31.08 20.99 25.94 28.04
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The results obtained from the binary logistic regression analysis with respect to stock market participation are presented in table 6 and 7. Table 6 contains the results obtained from the single variable models and table 7 contains the other relevant models. The results indicate a positive effect of advanced financial literacy, attitude, subjective norm and perceived behavioral control on actual stock market participation. Apparently, people that have more advanced financial knowledge are more likely to invest in the stock market in real life. This result is in line with the first hypothesis. Further, people with a positive attitude towards investing in stocks are also more likely to invest in the stock market in real life. This result confirms the second hypothesis and the results of the previous regression analysis. People that perceive the attitudes of significant others with respect to investing in the stock market to be more positive are also more likely to invest in the stock market in real life. This result confirms that third hypothesis of the current study and the results of the previous regression analysis. Finally, perceived behavioral control also has a positive effect on real life stock market participation. So, people that perceive themselves to be better able to invest in stocks are also more likely to invest in stocks in real life. This result is in line with the fourth hypothesis and the results of the previous regression analysis.
Finally, a regression analysis was conducted with respect to the consistency of the percentage allocated to stocks across the different scenarios. The results of this regression analysis can be seen in table 8 and 9.
Table 8 Summary of the regression analysis of variables predicting whether the percentage allocated to stocks was inconsistent between the three scenarios (N=133).
Model 1 Model 2
Variable β SE β β SE β
Advanced financial literacy -0.33** 0.06
Attitude
Subjective norm
Perceived behavioral control -0.04* 0.02
Constant 0.40** 0.29**
R2 0.13 0.04
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Table 9 Summary of the regression analysis of variables predicting whether the percentage allocated to stocks was inconsistent between the three scenarios (N=133).
Model 1 Model 2
Variable β SE β β SE β
Advanced financial literacy -0.23** 0.07
Attitude
Subjective norm
Perceived behavioral control -0.04* 0.01
Constant 0.35** 0.34**
R2 0.08 0.06
*p < 0.05 **p < 0.01
Apparently, both advanced financial literacy and perceived behavioral control had a negative effect on the degree of inconsistency with respect to the asset allocation strategy that was applied between the three scenarios. So, people that are more financially literate are more consistent with respect to the percentage allocated to stocks across the different scenarios. This result is in line with the fifth hypothesis of the current study. Further, people that perceive themselves to be better able to invest in stocks are more consistent with respect to the percentage they allocate to stocks across the different scenarios. This result could indicate some degree of self-knowledge. People that perceive themselves to be better able to invest in the stock market appear to know that the riskiness of their asset allocation strategy should remain constant (assuming that their risk profile does not change).
5. Conclusions
The aim of the current study was to investigate factors that have an influence on the asset allocation strategies used by private investors. More specifically, the current study investigated the effect of financial literacy, attitude towards the stock market, subjective norm with respect to the stock market and the perceived ability of the investor to invest in the stock market on asset allocation strategies.
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explained by the fact that Rooij, Lusardi and Alessie (2011) measure stock market participation as a dichotomous variable (so, you either participate or not) and the current study measured stock market participation (with respect to the first hypothesis) as the relative percentage allocated to stocks. These results could indicate that people with advanced financial knowledge are more aware of the risks associated with investing in stocks and that they consequently choose not to allocate a lot of their wealth to stocks compared to people with less advanced financial knowledge. However, a positive effect of advanced financial knowledge was found with respect to the second asset allocation scenario. This result is in line with the first hypothesis proposed by the current study. An explanation for this deviating result might be that people with less advanced financial knowledge might not be aware of the fact that the initial asset allocation of scenario 1 between both funds has to be adjusted in scenario 2 if the investor wants a matching risk profile. Therefore less financially literate individuals might be overinvested in bonds whenever bonds are overrepresented in the funds that are presented to them (as was the case in the second scenario) compared to people with more advanced financial knowledge. A similar reasoning applies to the results obtained with respect to the relationship between advanced financial literacy and the degree of stock market participation in the third scenario. Finally, advanced financial literacy has a positive effect on actual stock market participation in real life. This result is in line with the result obtained by Rooij, Lusardi and Alessie (2011) and with the first hypothesis of the current study. Apparently, people that possess more advanced financial knowledge are more likely to invest in stocks in their real life. However, more advanced financially literate individuals have less relative wealth invested in stocks compared to less financially literate individuals.
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Another aim of the current study was to find out whether a positive subjective norm with respect to stock market participation had a positive influence on stock market participation. The results of the current study with respect to this hypothesis are somewhat conflicting. No significant effect of a positive subjective norm was found with respect to the percentage allocated to stocks in the three scenarios that were presented to the participants. However, a positive subjective norm did have a positive effect on actual stock market participation. This indicates that people that perceive the attitudes of significant others to be more positive with respect to stock market participation are more likely to invest in the stock market in real life. This latter result is in line with the research by Brown, Ivkovic, Smith and Weisbenner (2008) and Hong, Kubik and Stein (2004) related to peer effects and stock market participation. Apparently, investors are more likely to invest in the stock market when they perceive a positive attitude of significant others with respect to the stock market but they do not necessarily invest more in relative terms in stocks compared to other investors.
Fourthly, the current study investigated whether the perceived behavioral control of participants influenced their asset allocation strategy. The results of the current study revealed that participants that believed that they are better able to invest in stocks also had a higher percentage allocated to stocks and were more likely to invest in the stock market in real life. This result confirms the third hypothesis. Apparently, people that perceive themselves as able to invest in the stock market are more likely to actually do so and also have a higher percentage of their wealth invested in stocks.
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bonds compared to stocks. In such a situation, participants might be exposed to too little risk. The current study also found evidence with respect to a positive effect of perceived behavioral control on asset allocation consistency. This might indicate a degree of self-knowledge, people that perceive themselves better able to invest in stocks are also able to invest more consistently.
The contribution of the current study has thus been to provide a conceptual framework (the theory of planned behavior by Azjen (1988) combined with financial literacy) for measuring the intention of investors to elicit certain asset allocation strategies which can be used as a proxy for actual behavior in the stock market. Further, the current study has provided some additional insights with respect to the determinants of stock market behavior which might be of interest for policymakers and practitioners. The financial literacy survey has revealed that people have little knowledge with respect to bonds, bond markets and the long term returns of both stocks and bonds and the scenario experiment indicated that less financially literate individuals have difficulty with grasping the concept of “risk” in asset allocation and how to deal with it.
6. Discussion
6.1 Limitations
A limitation of the current study is the fact that the individuals risk attitude was not controlled for. An investor’s asset allocation should depend to a great extent on the risk preference of the investor. For example, the positive effect that was found of attitude on the percentage allocated to stocks could be explained by the risk profile of the participants. It could be that people that have a (very) positive attitude with respect to investing in the stock market have a high degree of risk tolerance which causes their positive attitude towards stock market participation. In that case, the risk preference of an investor might be a better predictor compared to his attitude towards the stock market.
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return history of both different bonds and stocks, investors with little advanced financial knowledge can base their asset allocation on such information of the different asset classes. Such an approach could prevent participants from randomly assigning weights to both funds.
Another limitation of the current study is the fact that the sample that was used might not be very representative. In general, the participants were relatively highly educated and also possessed a relatively high degree of financial knowledge. This makes it more difficult to generalize the results of the current study to the entire population.
6.2 Implications for future research
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Appendix A
Basic financial concepts:
1. Suppose you had 100 euros in a savings account and the interest rate was 2% per year. After 5years, how much do you think you would have in the account if you left the money to grow?
(i) More than 102 euros; (ii) Exactly 102 euros; (iii) Less than 102 euros; (iv) Do not know
2. Suppose you had 100 euros in a savings account and the interest rate is 20% per year and you never withdraw money or interest payments. After 5 years, how much would you have on this account in total? (i) More than 200 euros; (ii) Exactly 200 euros; (iii) Less than 200 euros; (iv) Do not know
3. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? (I )More than today; (ii) Exactly the same; (iii) Less than today; (iv) Do not know
4. Assume a friend inherits 10,000 euros today and his sibling inherits 10,000 euros 3 years from now. Who is richer because of the inheritance? (i) My friend; (ii) Hissibling; (iii) They are equally rich; (iv) Do not know
5. Suppose that in the year 2010, your income has doubled and prices of all goods have doubled too. In 2010, how much will you be able to buy with your income? (i) More than today; (ii) The same; (iii) Less than today; (iv) Do not know
Advanced financial concepts:
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7. Which of the following statements is correct? If somebody buys the stock of firm B in the stock market: (i) He owns a part of firm B; (ii) He has lent money to firm B; (iii) He is liable for firm B’s debts; (iv) None of the above; (v) Do not know;
8. Which of the following statements is correct? (i) Once one invests in a mutual fund, one cannot withdraw the money in the first year; (ii) Mutual funds can invest in several assets, for example invest in both stocks and bonds; (iii) Mutual funds pay a guaranteed rate of return which depends on the past performance; (iv) None of the above; (v) Do not know;
9. Which of the following statements is correct? If somebody buys a bond of firm B: (i) He owns a part of firm B; (ii) He has lent money to firm B; (iii) He is liable for firm B’s debts; (iv) None of the above; (v) Do not know;
10. Considering a long time period( for example 10 or 20 years), which asset normally gives the highest return? (i) Savings accounts; (ii) Bonds; (iii) Stocks; (iv) Do not know;
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11. Normally, which asset displays the highest fluctuations over time? (i) Savings accounts; (ii) Bonds; (iii) Stocks; (iv) Do not know
12. When an investor spreads his money among different assets, does the risk of losing money: (i) Increase; (ii) Decrease; (iii) Stay the same; (iv) Do not know
13. If you buy a 10-year bond, it means you cannot sell it after 5 years without incurring a major penalty. True or false? (i) True; (ii) False; (iii) Do not know
14. Stocks are normally riskier than bonds. True or false? (i) True; (ii) False; (iii) Do not know;
15. Buying a company stock usually provides a safer return than a stock mutual fund. True or false? (i) True; (ii) False; (iii) Do not know
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Theory of planned behavior
17. I have a positive attitude towards investing in stocks. a) Totally agree
b) Somewhat agree c) Neutral
d) Somewhat disagree e) Totally disagree
18. I believe that the people I know have a positive attitude towards investing in stocks. a) Totally agree
b) Somewhat agree c) Neutral
d) Somewhat disagree e) Totally disagree
19. I believe that I am able to invest in stocks. a) Totally agree b) Somewhat agree c) Neutral d) Somewhat disagree e) Totally disagree
20. I invest in stocks myself. a) Yes
b) No
Scenarios
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2. Imagine that you are busy planning your pension and you can chose between two funds to invest your money in, respectively fund A and fund B. Fund A is a balanced fund consisting of stocks and bonds (50/50) and fund B consists solely of bonds. These funds are your only two options. Indicate how you would divide your money across both funds (remember that both percentages should sum up to 100%).
