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Confidence in Financial Literacy, Stock Market Participation, and Retirement Planning

Abstract

This study investigated whether overconfidence with respect to one’s financial literacy affects stock market participation and retirement preparation and if so, how. Using an effective sample of 12,653 Japanese individuals, the empirical results confirm that financial literacy plays a positive role, while confidence in financial literacy also matters. For people with relatively low financial literacy, overconfidence can encourage taking financial action, while for people with high financial literacy, underconfidence can deter action. Confidence could have an effect equal to or greater than financial literacy. Moreover, it was also found that the positive effect of overconfidence is weaker for women than for men.

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Available upon permission of the data source.

Notes

  1. Other related attributes include better-than-average effect, illusion of control, and excessive optimism.

  2. “Better-than-average effect” is related to overconfidence, which means that people, when asked to rate themselves relative to average on certain positive personal attributes such as skill or ability, rate themselves as above average on those attributes.

  3. For example, respondents are asked multiple-choice questions on common knowledge. Then, they are asked to rate the accuracy of their answers. If someone self-reports an accuracy level of 90% while getting 70% of the questions right, then he or she is considered overconfident.

  4. Some others used the tendency of CEOs to voluntarily hold a large number of in-the-money-options as a proxy for overconfidence (Malmendier and Tate, 2008).

  5. These residence dummies are Tohoku (including prefectures of Aomori, Iwate, Miyagi, Akita, Yamagata, Fukushima, and Hokkaido), Kanto (Ibaragi, Tochigi, Gunma, Saitama, Chiba, Kanagawa, and Yamanashi), Tokyo, Chubu (Niigata, Toyama, Ishii, Fukui, Nagano, Gifu, Shizuoka, Aichi, and Mie), Keihan (Kyoto and Osaka), Kinki (Shiga, Hyogo, Nara, and Wakayama), Chugoku (Tottori, Shimane, Okayama, Hiroshima, and Yamaguchi), Shikoku (Tokushima, Kagawa, Ehime, and Kochi), and Kyushu (Fukuoka, Saga, Nagasaki, Kumamoto, Oita, Miyazaki, Kagoshima, and Okinawa).

  6. The choices are: (1) living expenses for own lifetime, children's educational expenses, and medical expenses for self, (2) children's educational expenses, costs of buying a house, and living expenses for own retirement, (3) costs of buying a house, medical expenses for self, and costs of nursing care for parents, and (4) Don’t know.

  7. Other instruments for financial literacy include the mathematical ability during the teens (Gathergood and Weber, 2017; Jappelli and Padula, 2013), the experience of family members (Behrman et al., 2012; Rooij et al., 2011), or the number of universities or newspaper circulating in the neighborhood (Klapper et al., 2013).

  8. Marginal effect at the means is not informative since there are many categorical variables in the regressions.

  9. For each respondent, we calculate the difference in the marginal effect of CI on the dependent variable between men and women, which is the interaction effect. After obtaining the interaction effect, the associated standard error and z-value for all respondents, the averages of these statistics are computed.

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Acknowledgements

The authors are grateful to the referees and the editor for their valuable comments. We also appreciate the comments from Prof. Konari Uchida and participants at the research seminar in Kyushu University in 2019. We would also like to thank Editage for English language editing.

Funding

The corresponding author acknowledges financial support from JSPS KAKENHI (JP17K03807) and Nomura Foundation Social Science Research Grant.

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Correspondence to Tsung-ming Yeh.

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Yeh, Tm., Ling, Y. Confidence in Financial Literacy, Stock Market Participation, and Retirement Planning. J Fam Econ Iss 43, 169–186 (2022). https://doi.org/10.1007/s10834-021-09769-1

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Keywords

  • Objective financial literacy
  • Subjective financial literacy
  • Overconfidence
  • Stock investment
  • Retirement planning