1. Does Financial Knowledge Alleviate Risk Attitude and Risk Behavior Inconsistency?
Aslihan Gizem Korkmaza, Zhichao Yinb, Pengpeng Yueb,c,Haigang Zhouc
aDominican University of California, San Rafael, CA , USA
bCapital University of Economics and Business, Beijing , China
cCleveland State University, Cleveland, OH , USA
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2. Introduction
Risk Preference
Inconsistency
Risk Behavior
Sitkin and Pablo (1992) propose a detailed conceptual model on risk behavior.
3 individual characteristics;
Risk preference
Risk perception
Risk propensity
are related to risk behavior.
Encourage other researchers to focus on smaller sets of their variables based on their specialized subareas of risk behavior.
Sitkin and Weingart (1995) provide initial tests of the key portions.
Financial
Knowledge
Psychology
Finance
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3. Gap in Literature
Need empirical studies to support the conceptual model in Sitkin and Pablo (1992)
Studies like Sitkin and Weingart (1995) conduct studies with students, limited sample size
Different settings – Household Financial Decision Making
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4. Household Financial Decision Making
Risk Preference
Risk Propensity
Risk Behavior
Risk preference (attitude): whether an individual enjoys risk, individuals self- report their willingness to take risks, in general. (Sitkin and Pablo, 1992; Dohmen et al., 2011; Almenberg and Dreber, 2015)
Financial
Knowledge
Risk propensity: an individual’s risk taking tendency. (Sitkin and Pablo, ; Sitkin and Weingart, 1995)
Familiarity: Decision maker’s experience or familiarity with the situation is an important determinant in the process. Experienced individuals are more likely to take risk. (Sitkin and Pablo, 1992)
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5. Data China Household Finance Survey (CHFS): 31,432 households
Similar to Survey of Consumer Finances (SCF) in the U.S.
CHFS offers detailed information on household income, expenses, assets, liabilities, insurance, securities, demographics, employment, and payment history. (Table 1)
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6. Inconsistency Variables
ICPref&Beh
ICPref&Beh1 +, -
ICPref&Beh2 -, +
Risk Preference
Risk Propensity
Risk Behavior
ICPref&Prop
ICPref&Prop1 +, -
ICPref&Prop2 -, +
ICProp&Beh
ICProp&Beh1 +, -
ICProp&Beh2 -, +
Financial
Knowledge
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7. Research Methods
Divide sample into deciles and quintiles based on financial knowledge and identify the high and low financial knowledge samples.
Then we perform mean comparison tests. (Table 4)
Panel A: Financial knowledge increases risky behavior for both risk-seeking and risk-averse households.
Panel B: Financial knowledge increases risky behavior for both households with and without risk propensity
Panel C: Financial knowledge increases risky behavior for both groups.
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8. Research Methods Baseline model
Yi represents inconsistency variables, whereas Xi represents control variables.
Those who attempt to plan for retirement become more financially knowledgeable in the process, which creates an endogeneity problem when testing for the relationship between financial literacy and retirement planning. (Lusardi and Mitchell, 2007)
A similar endogeneity concern could apply to our baseline model as well. In order to address such concerns, we employ a two-stage least squares (2SLS) approach by using the mean of financial-knowledge scores from other respondents in the same community as an instrumental variable.
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9. These results are consistent with those in Panel A of Table 4.
Financial knowledge has a significant negative effect on the inconsistency between risk preference and risk behavior.
Financial knowledge helps decrease ICPref&Beh1, meaning it increases risky behavior for risk-seeking households.
Financial knowledge increases ICPref&Beh2, meaning it increases risky behavior for risk-averse households.
These results are consistent with those in Panel A of Table 4.
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10. The Role of Financial Knowledge
Preference-Propensity-Behavior Chain
61.95%
7.95%
60.79%
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11. Financial knowledge has a significant negative effect on the inconsistency between risk propensity and risk behavior.
Financial knowledge helps decrease ICProp&Beh1, meaning it increases risky behavior for households with risk
propensity.
Financial knowledge increases ICProp&Beh2, meaning it increases risky behavior for households with no risk propensity.
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12. The Role of Financial Knowledge
Encouraging Risk Behavior
85.59%
14,41%
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13. Financial knowledge has a signicant positive effect on risk behavior.
The positive and significant coefficient on financial knowledge shows that financial knowledge increases risky behavior for both risk-seeking and risk-averse households.
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14. Robustness Tests Education as a proxy for financial knowledge:
Atkinson and Messy (2012) assert that there is a positive relationship between financial literacy and education. Thus, we use education as one of the control variables to avoid a possible endogeneity problem in our main empirical results.
Alternate measure for financial knowledge:
Following Fernandes et al. (2014), we also measure financial knowledge by the percentage of correct answers as an alternative proxy to our original method.
Using age threshold:
Christelis et al. (2010) study the relationship between cognitive abilities and stockholding using the Survey of Health, Ageing and Retirement in Europe. The authors draw attention to the decreasing tendency of people older than 65 to hold stocks and split their sample into two groups using this age as the threshold.
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15. Conclusion Financial knowledge;
Risk Preference
Risk Propensity
Risk Behavior
1. Inconsistency ↓
2. ↑
Financial
Knowledge
Financial knowledge;
1. Decrease the inconsistency between risk propensity and risk behavior
2. Encourage risky behavior
Different outcomes based on risk sensitivity;
↑ inconsistency for the risk-averse
↓inconsistency for the risk- seeking
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