The Luxemburg Wealth Study: Enhancing Comparative Research on Household Finance Comments on: Cognitive Abilities and Portfolio Choice by D. Christelis, T. Jappelli, and M. Padula and Financial Litteracy and Stock Market Participation by M. van Rooij, A. Lusardi and R. Alessie Marcello Bofondi Bank of Italy

The main question Can cognitive abilities / financial literacy help to explain the so called “stock-holding” puzzle? Why is it important to answer this question? Cocco et al. (2005): welfare loss from non-participation in stock markets can be substantial.

Motivation (1) Recent financial innovation created a large set of quite complicated, difficult to understand, financial assets. Following Campbell (2006) one can speculate that: “the existence of naïve household permits an equilibrium […] in which confusing financial products generate a cross- subsidy from naïve to sophisticated households”

Motivation (2) A “financial market participation channel” may therefore add to other factors (such as the widening wage differential between high-skilled and low-skilled workers) and contribute to increase wealth inequality.

Policy implications Given that both papers find a positive effect of cognitive abilities and financial literacy on stock-holding the most obvious policy response should be to increase numeracy and literacy through education. Unfortunately there is some evidence that formal economic education may not help (Mundell, 2006).

Policy implications (1) But we, as financial economists and researchers at central banks, can work in other directions. By enhancing competition in financial markets, proposing new and more effective market regulation, consumer protection policies and disclosure rules, we can help to lower all those explicit and implicit transaction costs that prevent may households to participate in financial markets (Campbell, 2006).

Some specific comments on Cognitive Abilities and Portfolio Choice by D. Christelis, T. Jappelli, and M. Padula

Cognitive abilities … Very interesting paper with many results, not only about cognitive abilities. Besides the questions that measure cognitive abilities a second unique characteristic of the SHARE is to have comparable cross country data. Maybe some more effort could be made to exploit this feature.

Cognitive abilities … Explicit transaction costs (fees and commissions paid by households to access the financial markets) vary across the different countries covered by SHARE. Some information is available about average mutual funds commissions (the TER computed by Fitzrovia). An individual with lower cognitive abilities has higher implicit transaction costs. Therefore the impact of cognitive abilities could be different depending on the level of explicit transaction costs.

Cognitive abilities … Cognitive abilities are influenced by health and education. In order to measure the “net effect” of cognitive abilities the authors control for these individual characteristics. Then education is excluded from the controls in order to measure the “gross” effect of cognition. Why not doing the same for health?

Cognitive abilities … The authors perform a number of interesting sample splits. The first one is by marital status. It is not totally clear why. The authors find that numeracy has a much stronger effect for couples than for single and that memory is significant only for coulples. Very similar result are obtained when splitting he sample by the degree of social interaction. I would interpret the result of the two sample splitting in the same way. After all marriage is a sort of social interaction …

Some specific comments on Financial Litteracy and Stock Market Participation by M. van Rooij, A. Lusardi and R. Alessie

Financial literacy … Main contributions: -literacy indexes -noise in the responses - disentangle the effect of basic and advanced financial literacy controlling for possible endogeneity problems

Financial literacy … The data set contains information on both self-assessed and objective literacy. The two measures are correlated, but one could exploit the difference between the two, to verify if overconfidence has a role in stock-holding. Overconfidence may be even more harmful than non- participation!

Financial literacy … The data set contains information on the different sources of advice when making financial decisions. This information could be exploited to verify if the role of financial literacy is magnified or reduced by the different sources of advice.

Some more comments on both papers …

Cognitive abilities and Financial literacy … 1- Sample split by wealth 2- What about the role of cognition and literacy on financial liabilities?