Wharton Pension Research Council Working Papers
 

Title

Financial Illiteracy and Stock Market Participation: Evidence from the RAND American Life Panel

Author(s)

Joanne Yoong, RAND

Document Type

Working Paper

Date of this Version

10-1-2010

Abstract

Financially unsophisticated consumers who consistently make sub-optimal financial decisions may suffer lasting consequences for long-term wealth accumulation and welfare. This paper focuses attention on a well-documented area of potentially suboptimal financial decision making: the lack of stock market participation. Using a broad-based assessment of financial literacy administered to a sample of older American respondents in the RAND American Life Panel (ALP), we use a novel strategy for establishing causation between stock-market related financial literacy and stock market participation, using knowledge of other financial topics as instrumental variables. We find that ignorance of stock market investment knowledge significantly reduces propensity to hold stocks. In particular, a decrease of one-standard deviation in the relevant measure suggests a decrease on the order of 10% in participation.

Comments

The published version of this Working Paper may be found in the 2011 publication: Financial Literacy: Implications for Retirement Security and the Financial Marketplace.

Working Paper Number

WP2010-29

Copyright/Permission Statement

Opinions and conclusions are solely those of the author(s) and do not reflect views of the institutions supporting the research, with whom the authors are affiliated, or the Pension Research Council. Copyright 2010 © Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.

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Date Posted: 07 August 2019