Your browser does not support the PubReader view.
Go to this page to see a list of supporting browsers.
Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 35, No. 2, pp.159-186
ISSN: 1225-0279 (Print)
Print publication date 31 May 2022
Received 07 Dec 2021 Revised 19 Apr 2022 Accepted 12 May 2022
DOI: https://doi.org/10.22904/sje.2022.35.2.003

Heterogeneous Relationship between Financial Literacy and Fund Investment Behaviors: Evidence from South Korea during the Financial Crisis

Jongwoo Chung ; Booyuel Kim
Jongwoo Chung, Economist, Micro & Institutional Economics Team, Economic Research Institute, Bank of Korea jchung@bok.or.kr
Booyuel Kim, Associate Professor, Department of Environmental Planning, Graduate School of Environmental Studies, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul 08826, Republic of Korea booyuel@snu.ac.kr

JEL Classification: D12, D91, E22, G11

Abstract

The importance of financial knowledge on efficient investment behaviors is well known. However, few studies have examined the relationship between financial literacy and investment behaviors under different economic situations. Using the 2007–2016 Fund Investors Survey from South Korea, we investigate the heterogeneous effects of financial literacy on individual investment decisions during and after the 2008 financial crisis. While differentiating objective and subjective financial knowledge, we find that only subjective knowledge is positively related to participation in financial markets and negatively related to fund exit decisions during the financial crisis (2007–2008). However, in the post-crisis period (2009–2016), both subjective and objective financial knowledge affect fund investment behaviors. We further examine these results through a knowledge calibration mechanism. We present suggestive evidence that the effect of subjective knowledge during the financial crisis is not driven by overconfident investors whose subjective knowledge level deviates from objective knowledge but by the group whose subjective and objective knowledge are highly calibrated.

Keywords:

Financial Crisis, Financial literacy, Knowledge calibration, Objective knowledge, Subjective knowledge

Acknowledgments

The authors would like to thank Korea Financial Investors Protection Foundation for providing the “Fund Investors Survey 2007–2016” dataset. We also appreciate Taejun (David) Lee and seminar participants at the 2020 KDI School–World Bank DIME Conference on Impact Evaluation, 2020 IAFICO (International Academy of Financial Consumers) Annual Conference, and BOKERI (Bank of Korea Economic Research Institute) Seminar for their helpful comments. No potential competing interest was reported by the authors.

References

  • Alba, J. W., & Hutchinson, J. W. “Knowledge Calibration: What Consumers Know and What They Think They Know.” Journal of Consumer Research 27(No. 2 2000): 123-156. [https://doi.org/10.1086/314317]
  • Almenberg, J., & Dreber, A. “Gender, Stock Market Participation, and Financial Literacy.” Economics Letters 137(2015): 140-142. [https://doi.org/10.1016/j.econlet.2015.10.009]
  • Barber, B. M., & Odean, T. “The Courage of Misguided Convictions.” Financial Analysts Journal 55(No. 6 1999): 41-55. [https://doi.org/10.2469/faj.v55.n6.2313]
  • Baumeister, R. F., Campbell, J. D., Krueger, J. I., & Vohs, K. D. “Does High Self-esteem Cause Better Performance, Interpersonal Success, Happiness, or Healthier Lifestyles?” Psychological Science in the Public Interest 4(No. 1 2003): 1-44. [https://doi.org/10.1111/1529-1006.01431]
  • Behrman, J. R., Mitchell, O. S., Soo, C. K., & Bravo, D. “How Financial Literacy Affects Household Wealth Accumulation.” American Economic Review 102(No. 3 2012): 300-304. [https://doi.org/10.1257/aer.102.3.300]
  • Bucher-Koenen, T., & Lusardi, A. “Financial Literacy and Retirement Planning in Germany.” Journal of Pension Economics & Finance 10(No. 4 2011): 565-584. [https://doi.org/10.1017/S1474747211000485]
  • Bucher-Koenen, T., & Ziegelmeyer, M. “Once Burned, Twice Shy? Financial Literacy and Wealth Losses during the Financial Crisis.” Review of Finance 18(No.6 2014): 2215-2246. [https://doi.org/10.1093/rof/rft052]
  • Calvet, L. E., Campbell, J. Y., & Sodini, P. “Down or Out: Assessing the Welfare Costs of Household Investment Mistakes.” Journal of Political Economy 115(No.5 2007): 707-747. [https://doi.org/10.1086/524204]
  • Carlson, J. P., Vincent, L. H., Hardesty, D. M., & Bearden, W. O. “Objective and Subjective Knowledge Relationships: A Quantitative Analysis of Consumer Research Findings.” Journal of Consumer Research 35(No.5 2008): 864-876. [https://doi.org/10.1086/593688]
  • Christelis, D., Jappelli, T., & Padula, M. “Cognitive Abilities and Portfolio Choice.” European Economic Review 54(No.1 2010): 18-38. [https://doi.org/10.1016/j.euroecorev.2009.04.001]
  • Chu, Z., Wang, Z., Xiao, J. J., & Zhang, W. “Financial Literacy, Portfolio Choice and Financial Well-being.” Social Indicators Research, 132(No. 2 2017): 799-820. [https://doi.org/10.1007/s11205-016-1309-2]
  • Chung, J., & Kim, B. (2022), Dataset for “Heterogeneous Relationship between Financial Literacy and Fund Investment Behaviors: Evidence from South Korea during the Financial Crisis.” Mendeley Data, V1.
  • Chung, Y., & Park, Y. “What I Know, What I Think I Know, and Whom I Know.” Journal of Consumer Affairs 53(No. 3 2019): 1312-1349. [https://doi.org/10.1111/joca.12231]
  • Daniel, K., Hirshleifer, D., & Subrahmanyam, A. “Investor Psychology and Security Market Under-and Overreactions.” The Journal of Finance 53(No.6 1998): 1839-1885. [https://doi.org/10.1111/0022-1082.00077]
  • Deaton, A. “Panel Data from Time Series of Cross-sections.” Journal of Econometrics 34(1985): 109-126. [https://doi.org/10.1016/0304-4076(85)90134-4]
  • De Bondt, W. F., & Thaler, R. “Does the Stock Market Overreact?” The Journal of finance 40(No. 3 1985): 793-805. [https://doi.org/10.1111/j.1540-6261.1985.tb05004.x]
  • Dhaoui, A., & Bacha, S. “Investor Emotional Biases and Trading Volume’s Asymmetric Response: A Non-linear ARDL Approach Tested in S&P500 Stock Market.” Cogent Economics & Finance 5(No. 1 2017): 1274225. [https://doi.org/10.1080/23322039.2016.1274225]
  • Di Paula, A., & Campbell, J. D. “Self-esteem and Persistence in the Face of Failure.” Journal of Personality and Social Psychology 83(No.3 2002): 711. [https://doi.org/10.1037/0022-3514.83.3.711]
  • Gerardi, K., Goette, L., & Meier, S. Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data. Diane Publising, 2010. [https://doi.org/10.2139/ssrn.1600905]
  • Gervais, S., & Odean, T. “Learning to be Overconfident.” The Review of Financial Studies 14(No.1 2001): 1-27. [https://doi.org/10.1093/rfs/14.1.1]
  • Goetzmann, W. N., & Peles, N. “Cognitive Dissonance and Mutual Fund Investors.” Journal of Financial Research 20(No.2 1997): 145-158. [https://doi.org/10.1111/j.1475-6803.1997.tb00241.x]
  • Griffin, J. M., Nardari, F., & Stulz, R. M. “Do Investors Trade More When Stocks Have Performed Well? Evidence from 46 Countries.” The Review of Financial Studies 20(No.3 2007): 905-951. [https://doi.org/10.1093/rfs/hhl019]
  • Hadar, L., Sood, S., & Fox, C. R. “Subjective Knowledge in Consumer Financial Decisions.” Journal of Marketing Research 50(No. 3 2013): 303-316. [https://doi.org/10.1509/jmr.10.0518]
  • Hastings, J., & Mitchell, O. S. “How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors.” Journal of Pension Economics & Finance 19(No.1 2020):1-20. [https://doi.org/10.1017/S1474747218000227]
  • Hastings, J., & Tejeda-Ashton, L. Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico (No. w14538). National Bureau of Economic Research, 2008. [https://doi.org/10.3386/w14538]
  • Hibbert, A. M., Lawrence, E. R., & Prakash, A. J. “The Role of Financial Education in the Management of Retirement Savings.” Journal of Behavioral Finance 13(No.4 2012): 299-307. [https://doi.org/10.1080/15427560.2012.735727]
  • Kim, I. J., & Rhee, Y. “Global Financial Crisis and the Korean Economy.” Seoul Journal of Economics 22(No. 2 2009): 145-179.
  • Klapper, L., Lusardi, A., & Panos, G. A. “Financial Literacy and Its Consequences: Evidence from Russia during the Financial Crisis.” Journal of Banking & Finance 37(No. 10 2013): 3904-3923. [https://doi.org/10.1016/j.jbankfin.2013.07.014]
  • Lee, Taejun, Kim, Booyuel & Son, Hyelim. “Financial Literacy, Financial Knowledge Calibration, and Financial Consumer Protection: Lessons Learned from Mutual Fund Investor Survey.” Journal of Consumer Policy Studies 48(No. 2 2017): 303-338. (in Korean) [https://doi.org/10.15723/jcps.48.2.201708.303]
  • Lusardi, A., & Mitchell, O. S. “Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth.” Journal of Monetary Economics 54(No.1 2007): 205-224. [https://doi.org/10.1016/j.jmoneco.2006.12.001]
  • Lusardi, A., & Mitchell, O. S. “The Economic Importance of Financial Literacy: Theory and Evidence.” Journal of Economic Literature 52(No. 1 2014): 5-44. [https://doi.org/10.1257/jel.52.1.5]
  • Lusardi, A., Mitchell, O. S., & Curto, V. “Financial Literacy Among the Young.” Journal of Consumer Affairs 44(No. 2 2010): 358-380. [https://doi.org/10.1111/j.1745-6606.2010.01173.x]
  • Lusardi, A., & Tufano, P. “Debt Literacy, Financial Experiences, and Overindebtedness.” Journal of Pension Economics & Finance 14(No. 4 2015): 332-368. [https://doi.org/10.1017/S1474747215000232]
  • Lusardi, A., Michaud, P. C., & Mitchell, O. S. “Optimal Financial Knowledge and Wealth Inequality.” Journal of Political Economy 125(No. 2 2017): 431-477. [https://doi.org/10.1086/690950]
  • Meier, C., & De Mello, L. “Investor Overconfidence in Experimental Asset Markets across Market States.” Journal of Behavioral Finance 21(No. 4 2020): 369-384. [https://doi.org/10.1080/15427560.2019.1692845]
  • Neymotin, F. “Linking Self-esteem with the Tendency to Engage in Financial Planning.” Journal of Economic Psychology 31(No. 6 2010): 996-1007. [https://doi.org/10.1016/j.joep.2010.08.006]
  • Nofsinger, J. R. “Social Mood and Financial Economics.” The Journal of Behavioral Finance 6(No.3 2005): 144-160. [https://doi.org/10.1207/s15427579jpfm0603_4]
  • Noor, N., Batool, I., & Arshad, H. M. “Financial Literacy, Financial Self-efficacy and Financial Account Ownership Behavior in Pakistan.” Cogent Economics & Finance 8(No. 1 2020): 1806479. [https://doi.org/10.1080/23322039.2020.1806479]
  • Odean, T. “Do Investors Trade Too Much?.” American Economic Review 89(No.5 1999): 1279-1298. [https://doi.org/10.1257/aer.89.5.1279]
  • Park, C. W., Gardner, M. P., & Thukral, V. K. “Self-perceived Knowledge: Some Effects on Information Processing for a Choice.” The American Journal of Psychology 101(No. 3 1988): 401-424. [https://doi.org/10.2307/1423087]
  • Park, J. H., & Lee, S. “Global Financial Crisis: Background, Prospects, and Its Impacts on Korea.” Seoul Journal of Economics 22(No.1 2009): 77-94.
  • Pillai, K. G., & Goldsmith, R. E. “Calibrating Managerial Knowledge of Customer Feedback Measures: a Conceptual Model.” Marketing Theory 6(No. 2 2006): 223-243. [https://doi.org/10.1177/1470593106063984]
  • Pillai, K. G., & Hofacker, C. “Calibration of Consumer Knowledge of the Web.” International Journal of Research in Marketing 24(No. 3 2007): 254-267. [https://doi.org/10.1016/j.ijresmar.2007.02.001]
  • Robb, C. A. “Financial Knowledge and Credit Card Behavior of College Students.” Journal of Family and Economic Issues 32(No. 4 2011): 690-698. [https://doi.org/10.1007/s10834-011-9259-y]
  • Robb, C. A., & Babiarz, P. “Financial Sophistication and Credit Card Behaviors Revision.” The International Review of Financial Consumers (No. 1 2016): 25-39.
  • Robb, C. A., & Woodyard, A. “Financial Knowledge and Best Practice Behavior.” Journal of Financial Counseling and Planning 22(No. 1 2011).
  • Sommer, K. L., & Baumeister, R. F. “Self-evaluation, Persistence, and Performance Following Implicit Rejection: The Role of Trait Selfesteem.” Personality and Social Psychology Bulletin 28(No. 7 2002): 926-938. [https://doi.org/10.1177/01467202028007006]
  • Stango, V., & Zinman, J. “Exponential Growth Bias and Household Finance.” The Journal of Finance 64(No. 6 2009): 2807-2849. [https://doi.org/10.1111/j.1540-6261.2009.01518.x]
  • Stolper, O. A., & Walter, A. “Financial Literacy, Financial Advice, and Financial Behavior.” Journal of Business Economics 87(No. 5 2017): 581-643. [https://doi.org/10.1007/s11573-017-0853-9]
  • Tang, N., & Baker, A. “Self-esteem, Financial Knowledge and Financial Behavior.” Journal of Economic Psychology 54(2016): 164-176. [https://doi.org/10.1016/j.joep.2016.04.005]
  • Van Rooij, M. C., Lusardi, A., & Alessie, R. “Financial Literacy and Retirement Planning in the Netherlands.” Journal of Economic Psychology 32(No. 4 2011): 593-608. [https://doi.org/10.1016/j.joep.2011.02.004]
  • Van Rooij, M. C., Lusardi, A., & Alessie, R. “Financial Literacy and Stock Market Participation.” Journal of Financial Economics 101(No. 2 2011): 449-472. [https://doi.org/10.1016/j.jfineco.2011.03.006]
  • Van Rooij, M. C., Lusardi, A., & Alessie, R. “Financial Literacy, Retirement Planning and Household Wealth.” The Economic Journal 122(No. 560 2012): 449-478. [https://doi.org/10.1111/j.1468-0297.2012.02501.x]
  • Wood, R., & Bandura, A. “Social Cognitive Theory of Organizational Management.” Academy of Management Review 14(No. 3 1989): 361-384. [https://doi.org/10.5465/amr.1989.4279067]
  • Xiao, J. J., Tang, C., Serido, J., & Shim, S. “Antecedents and Consequences of Risky Credit Behavior among College Students: Application and Extension of the Theory of Planned Behavior.” Journal of Public Policy & Marketing 30(No. 2 2011): 239-245. [https://doi.org/10.1509/jppm.30.2.239]