Cognitive Abilities and Portfolio Choice
Dimitris Christelis (University of Salerno and CSEF)
Tullio Jappelli (University of Napoli Federico II, CSEF and CEPR)
Mario Padula (University of Salerno and CSEF)
We study the relation between cognitive abilities and stockholding using the recent Survey of Health, Ageing and Retirement in Europe (SHARE), which has detailed data on wealth and portfolio composition of individuals aged 50+ in 11 European countries and three indicators of cognitive abilities: mathematical, verbal fluency, and recall skills. We find that the propensity to invest in stocks is strongly associated with cognitive abilities, for both direct stock market participation and indirect participation through mutual funds and retirement accounts. We also find that stockholding increases with social interactions, intention to leave bequests, and is negatively associated with health status
A large body of empirical research documents that many individuals do not invest in stocks and other financial assets. Limited financial market participation has important implications for individual welfare and the explanation of the equity premium puzzle, and is one of the most active areas of research in the field of household finance (Campbell (2006)).
The literature relies on transaction and information costs broadly interpreted as the main explanation for why some individuals choose zero holdings for stocks and other financial assets (Vissing-Jorgensen (2004)). But the exact nature of these costs is not well understood, and the challenge of current research is to single out the factors that prevent large sectors of the population from holding stocks. In this paper we focus on lack of cognitive abilities (such as reading skills and ability to perform simple numerical calculations) as a potential explanation for limited financial market participation. To request a copy of this paper click here
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