ACCI Conference 2020

The purpose of the study is to compare portfolio risk undertaken by the investors who make an estimation error in risk tolerance to those who do not make estimation error. Although some investors systematically miss-assess their financial risk tolerance—some overestimate while others underestimate, nevertheless, investors who accurately assess their risk tolerance are more likely to hold riskier portfolio than those who overestimate their risk tolerance. A differential prediction model was used to assess the presence of estimation errors. We used investment risk tolerance data from 2017-2018 for this study. The results showed that the survey participants did show the presence of estimation errors in financial risk tolerance. These estimation errors were associated with portfolio risk controlling for demographic variables, and utilization of professional when making investment decisions. Most importantly, investors who exhibited estimation errors both positive or negative were less likely to hold risky assets in their portfolio compared to those who do not make estimation error. It is important for financial advisors to be cautious in relying on any subjective assessment of clients’ financial risk tolerance that is not aligned with a psychometric assessment.

Author(s): Abed Rabbani

The willingness to take financial risk plays an important role in shaping investment behavior. Risk-averse investors prefer less profitable and less risky portfolios, while risk-tolerant investors prefer more aggressive portfolios in terms of risk and expected return. However, to achieve the financial goals within the desired timeline, even risk-averse investors sometimes need to be tolerant of increased risk, and higly risk-tolerant investors might need to rebalance their portfolios toward safer allocations. The effect of using a financial planner on investment portfolio choices may vary according to the clients' risk tolerance. Using data from the 2016 Survey of Consumer Finances and the probit and Tobit models, this study examined the effects of consulting a financial planner on the extensive (whether to have stocks) and intensive (how much to invest in stocks) margins of the investment decisions. The probit analysis showed that using a financial planner increased the probability of participating in the stock market for low-to medium risk-tolerant investors. The Tobit analysis showed that using a financial planner encouraged risk-averse investors to invest more in stocks and curtailed investments in stocks among highly risk-tolerant investors. The results provide evidence on the moderating role that financial planners play in shaping investment behavior.

Author(s): Danah Jeong, Patryk Babiarz

Households search for information in order to make better decisions about purchases and financial decisions. Optimal search for financial resources depends on both the expected gains from the financial resources as well as the time and monetary cost of searching. This paper investigates the associations between risk tolerance and investment searching behavior. The study offers a theoretical framework for the possible mechanisms of risk tolerance on searching behavior for investments. Empirical results using 2016 Survey of Consumer Finances (SCF) dataset show positive relationships between two measures of risk tolerance and search effort for investments. The results also support three hypothesized channels of risk tolerance on searching, that the risk tolerance may be related with the amount of asset, the type of asset, and the tolerated expected value loss. The relationships between search behavior and other covariates are also explored.

Author(s): Dongyue Ying, Sherman D. Hanna

College students are viewed as an important target of financial education for a variety of reasons. Key among these are the opportunities and limitations presented by the decisions they make while college students, including the impact of student loan debt on their future financial security. College is viewed as a "just-in-time" opportunity to reach college students when they are able to apply what they learn in collegiate financial education courses. As a result, there has been a proliferation of financial education courses on college campuses. However, very few studies have evaluated the effectiveness of the formal college financial education courses in which these students are enrolled. This study examines the impact of a collegiate financial education course on the financial literacy (defined as financial knowledge and financial skill) and financial well-being (defined as expected future financial security and current money management stress (Netemeyer et al. 2018) of enrolled students. It also explores the influence of student characteristics (financial socialization, high school financial education, gender, self-efficacy, and involvement in paying bills) on the impact of a course on enrolled students’ financial literacy and well-being.

Author(s): Dee Warmath, Michael G. Thomas, Brenda Cude

There is a pressing need for improved financial knowledge across the US population. Research has shown that financial education programs can be an effective solution to this problem. However, there is wide variability in the success of different education interventions, and the reasons for this heterogeneity are not yet fully understood. A crucial project is to increase our knowledge of best practices in financial education, in order to maximize the benefits participants in future courses receive. One important dimension of this goal is understanding the role of mathematics in a high quality personal finance course, given the well-documented correlation between mathematical knowledge and financial literacy. We present results from a study that investigates the relationship between financial learning and mathematical learning. A sample of high-school students were assessed on both financial and mathematical knowledge, before and after taking a course that combined mathematics and personal finance.

Author(s): Jack Marley-Payne, Philip Dituri, Andrew Davidson

The effectiveness of financial education is controversial, and calls have been made to change its delivery methods. Still, more recent studies show benefits of financial education for consumer capability and wellbeing. In this study, we take advantage of new information available from the 2018 National Financial Capability Study to examine if several specific financial education attributes such as requirement, hours, and quality can enhance multiple benefits brought by financial education among emerging adults. In this study, financial capability is defined as the ability to apply financial knowledge and perform desirable financial behavior for achieving financial wellbeing. Financial education is defined as educational programs aimed at improving people's money management knowledge and skills. Emerging adults refer to young people aged 18-25. Results of multivariate analyses suggest that different financial education attributes may have different effects on financial capability factors. For example, when all financial education attribute variables and control variables are entered to one multivariate regression model, requirement and hours seem more important to improve objective financial knowledge, and quality seems more important to improve confidence in knowledge, behavior, and perceived financial capability. The findings emphasize the importance of financial education quality in improving financial capability of emerging adults.

Author(s): Jing Jian Xiao, Nilton Porto

Aging is accompanied by many changes in life such as changes in finances and decreasing social networks, which can put some older adults at risk for late-life depression. The present study draws on conservation of resources theory and transactional stress theory to guide our understanding of how social network size, social support, and financial security serve as a balance of both risk and protection for late-life depression among older Americans using a nationally representative existing dataset, the Health and Retirement Study. A path analysis via structural equation modeling was conducted that included objective (i.e., objective isolation, objective financial status) and subjective perspectives (i.e., perceived financial security, perceived social isolation, perceived social support) simultaneously. Results demonstrated that both risk and protective factors mediated the relationship between aging alone and depression. Further, the relationship between aging alone and depression was mediated by both objective and subjective factors. Moreover, the significant mediation model was still remained significant after taking potential confounding factors (e.g., self-rated health status, gender, and educational attainment) into account. This study underscores the importance of investigating the balance between risk and protection for mental health, particularly depression, in the rising number of older adults aging alone in society.

Author(s): Shinae Choi, Jaimie Choi, Ian McDonough, Zhehan Jiang

Various ways of measuring attitude have their advantages and disadvantages and it becomes difficult to know which is the optimal way to achieve an accurate measurement (Krosnick, Judd, & Wittenbrink, 2019). The aim of this paper is to propose a scale measuring attitude towards consumer credit use based on different evidence of validity. An electronic survey was sent by email to students from two major universities in Quebec (Canada). A total of 1323 students completed it, whose 1006 were undergraduate students and 317 were (post)graduate students (male = 325, female = 981, not mentioned = 17). Messick's (1995) approach was used to collect several types of evidence of the validity of the construct. Preliminary results of an exploratory factor analysis indicate that three dimensions compose this scale: credit is good and useful (7 items; α =.818), credit worries (7 items; α =.723) and cost and indebtedness caused by credit (3 items ; α =.643). Knowing that attitude plays an important role and is significantly linked to the motivations for credit use and the method of selection for consumer financing (Pattarin & Cosma, 2012), an accurate measurement of attitude is essential to guide professionals and policy makers in their decision-making in the right direction.  

Author(s): Jacinthe Cloutier

This study investigates factors influencing objective financial knowledge (OFK), examines the factors influencing subjective financial knowledge (SFK), and compares the coefficients of influential factors for OFK and SFK. The first two research objectives are analyzed with Ordinary Least Squared (OLS) regression models while the third objective is analyzed using Seemingly Unrelated Estimation (SUE) for statistical comparison of coefficients of the determinants used in the OLS regression models. In this study, we use the following four categories factors influencing financial knowledge: (1) educational, (2) financial, (3) behavioral, and (4) demographic. Findings of this study contribute to the literature in three ways. First, by identifying the effects of educational factors, in particular, financial education experience, on both two types of financial knowledge, results shed light on the importance of financial education as noted by educators, financial practitioners, researchers, and policymakers. Second, by examining the effects of behavioral characteristics on financial knowledge, this study confirms that one can improve financial literacy through a behavioral intervention. Third, this study describes profiles of survey respondents' financial knowledge with a broad array of socio-demographic factors with different effects on OFK and SFK. Thus, this study can provide insight into underrepresented groups for financial literacy improvement efforts.

Author(s): Narang Park, Wookjae Heo, Jae Min Lee