Financial Literacy and Portfolio Dynamics PDF

17‐808
May 2017

“Financial Literacy and Portfolio Dynamics”

Milo Bianchi
Financial Literacy and Portfolio Dynamics
Milo Bianchiy
May 2017
Forthcoming in Journal of Finance
Abstract
We match administrative panel data on portfolio choices with sur-
vey measures of nancial literacy. When we control for portfolio risk,
the most literate households experience 0.4% higher annual returns
than the least literate households. Distinct portfolio dynamics are the
key determinant of this di erence. More literate households hold riskier
positions when expected returns are higher. They more actively rebal-
ance their portfolios and do so in a way that holds their risk exposure
relatively constant over time. They are more likely to buy assets that
provide higher returns than the assets that they sell.
I thank the editor and an anonymous referee for very detailed and constructive com-
ments as well as Bruno Biais, Alexander Guembel, Sebastien Pouget, Jean-Marc Tallon for
very useful discussions. I also thank Henri Luomaranta for excellent research assistance
and AXA, Amundi and SCOR Research Funds for nancial support. I have no relevant
or material nancial interests that relate to the research described in this paper.
y
Toulouse School of Economics, University of Toulouse Capitole, Toulouse, France.
E-mail: [email protected]
1
1 Introduction
It is well established that households exhibit substantial heterogeneity in
both the performance of their portfolios (Campbell (2006); Calvet, Camp-
bell and Sodini (2007)) and their understanding of basic nancial principles
(Lusardi and Mitchell (2011)). Recent evidence also suggests a precise re-
lationship between these facts: Households experiencing lower risk-adjusted
returns tend to be less literate (Von Gaudecker (2015)).1
The mechanisms underlying the relationship between nancial literacy
and returns are much less understood. Part of the challenge is empirical.
It is di cult to nd data that combine detailed information on household
portfolios with measures of household sophistication. Administrative data
typically lack direct measures of nancial sophistication. Survey data typi-
cally lack the details and the panel structure necessary to explore portfolio
dynamics. An important dimension of heterogeneity may arise (in our set-
ting, it will arise) from how households rebalance their portfolios over time
in response to market conditions or to their own returns.
This paper exploits administrative panel data on portfolio choices matched
with survey measures of nancial literacy. This allows us to provide the rst
analysis of how nancial literacy relates to rebalancing behaviors (or the lack
thereof) and to uncover novel mechanisms connecting nancial literacy and
portfolio returns.
We obtained data from a large French nancial institution. We observe
portfolio choices in a widespread investment product, called assurance vie, in
which households allocate their wealth between relatively safe and relatively
risky funds - essentially, pre-de ned bundles of bonds or stocks - and are
able to rebalance their portfolios over time. These observations are monthly
and cover the period 2002 2011. In addition, we constructed the returns of
each portfolio and various counterfactual returns. These data are combined
with the responses to a survey that we conducted on these clients, which
allows us to obtain a broader picture of clients' nancial activities outside
the company and of their behavioral characteristics, notably their nancial
sophistication.
While not covering the whole household portfolio, investments in assur-
ance vie often represent a substantial fraction of investors' nancial wealth.2
Moreover, they display some speci c features (in addition to their popularity
among French households) that make them particularly useful for our pur-
poses. When investing in these contracts, households face the same menu
of assets (the funds o ered by the company), and they select among pre-
1
This should be contrasted with explanations of heterogeneous returns based on un-
observed preferences or information (see Korniotis and Kumar (2013) for a discussion on
this point).
2
For the median household in our sample, the value of the contracts that we observe
amounts to approximately 50% of its nancial wealth.
2
de ned funds with a given risk pro le. This choice may be less subject to
behavioral biases than direct stock picking.
We begin our analysis by constructing an index of nancial literacy for
each investor. Following standard procedures, we ask each subject a series
of questions related to basic principles of household nance. Depending
on the number of correct answers, we classify each household on a 1
7 scale that serves as our main measure of nancial literacy. Financial
literacy correlates, as expected, with demographic variables (in particular,
education and wealth) and with nancial behaviors elicited in the survey (in
particular, stock market participation and holdings of nancial products).
These relationships con rm previous ndings in the literature and provide
support for the consistency of our measure of nancial literacy.
Our main interest is in how nancial literacy relates to portfolio choices.
We begin with the observation that, in our sample, more literate house-
holds experience higher portfolio returns. Controlling for various measures
of portfolio risk, the most literate households experience approximately 0:4%
higher yearly returns than the least literate households, relative to an aver-
age return of 4:3%. These magnitudes are in line with those estimated by
Von Gaudecker (2015) for Dutch households.
The core of our analysis is the relationship between nancial literacy
and portfolio choices, focusing in particular on portfolio rebalancing. We
pursue two main objectives: First, we wish to investigate how speci c nan-
cial choices help us to understand the above-mentioned relationship between
literacy and returns. Cross-sectional variations (for example, di erent expo-
sures to risk at a given point in time) are of little assistance in our setting;
portfolio dynamics appear to be more important. Second, we aim to pro-
vide direct evidence on whether some speci c nancial behaviors (such as
inertia or trend chasing) that are commonly believed to result from a lack
of sophistication are indeed correlated with low nancial literacy.
Our rst result is that more sophisticated households do not always take
more risk. Instead, their risk exposure varies systematically with market
conditions. More sophisticated households hold a larger risky share - that
is, a larger fraction of risky funds in their portfolio - when risky funds are
expected to o er higher returns.3 According to our estimates, a 1% increase
in the expected excess return of risky funds is associated to an increase in the
risky share by 2% for each unit of nancial literacy. This result is distinct
from the more common observation that stock market participation increases
with nancial literacy,4 and it suggests a speci c mechanism whereby literate
households obtain higher returns.
We then consider portfolio inertia. Several studies have documented
3
As detailed below, in this analysis we use realized returns in period t as a proxy for
expected returns in period t, given the information available at the end of t 1.
4
See Christelis, Jappelli and Padula (2010), Van Rooij, Lusardi and Alessie (2011),
Grinblatt, Keloharju and Linnainmaa (2011), Arrondel, Debbich and Savignac (2015).
3
inertia in household portfolios; a common claim is that such inertia is the
result of low nancial sophistication.5 Our data allow to provide a direct test
of this claim. Building on Calvet et al. (2009a), we decompose the observed
changes in the risky share over time into active changes due to portfolio
rebalancing and passive changes induced by di erential returns of risky vs.
riskless funds. We show that passive changes are relatively more important
for less sophisticated households. For the least sophisticated households, the
passive change accounts for 64% of the total change in the risky share over
12 months. For the most sophisticated households, by contrast, the passive
change accounts for 30%. These estimates provide the rst direct evidence
that households with lower nancial literacy display greater portfolio inertia.
Third, we investigate how the direction of rebalancing varies with -
nancial literacy. Trend-chasing behaviors have been often associated with
a lack of sophistication, as proxied, for example, by limited market experi-
ence.6 We can directly test this relationship by examining how households
move their wealth between safe and risky funds, depending on which funds
have gained value relative to others. We show that more literate households
are more likely to act as contrarians: they tend to move their wealth toward
funds that have experienced relatively lower returns in the past. This allows
them to hold their risky share relatively constant over time.
Finally, we show that rebalancing behaviors are an important determi-
nant of portfolio returns: The returns experienced by more sophisticated
households tend to exceed those that they would have earned without re-
balancing their portfolios. More sophisticated households are more likely to
buy funds that provide higher returns than the funds that they sell.
To the best of my knowledge, no other paper studies how survey measures
of nancial literacy relate to portfolio dynamics observed in administrative
data. Our analysis contributes to a rapidly growing literature on nancial
literacy and portfolio choices, as recently reviewed in Hastings, Madrian
and Skimmyhorn (2013) and Lusardi and Mitchell (2014). (See also Guiso
and Sodini (2013) for a broader survey on household nance.) Most of
this literature employs survey data on household portfolios. In particular,
as mentioned above, Von Gaudecker (2015) employs detailed survey data
to estimate the return loss associated with low nancial sophistication and
analyze its interaction with professional advising. Compared to our data,
survey data are more comprehensive, but they often lack the details and
panel dimension that we exploit to address our questions.
Several studies (reviewed, e.g., in Barber and Odean (2013)) use bro-
kerage account data to document how the behavior of individual investors
may depart from standard benchmarks. By employing explicit measures of
5
See Calvet, Campbell and Sodini (2009a), Graham, Harvey and Huang (2009), Bilias,
Georgarakos and Haliassos (2010).
6
See Goetzmann and Kumar (2008); Greenwood and Nagel (2009); Bilias et al. (2010).
4
nancial literacy, our analysis provides a more direct test of whether speci c
investment behaviors are linked to (a lack of) nancial sophistication.
A few other studies investigate the e ects of nancial sophistication by
matching survey and administrative data. Dorn and Huberman (2005) focus
on the relationship between (over)con dence and portfolio underdiversi ca-
tion. Guiso and Viviano (2015) show that more sophisticated households
made better portfolio choices during the 2008 nancial crisis, although the
e ects of nancial literacy are small.7 Using Finnish administrative data,
Grinblatt et al. (2011) show that investors with higher IQs are more likely
to participate in the stock market and hold better performing portfolios;
Grinblatt, Keloharju and Linnainmaa (2012) focus on the trading of indi-
vidual stocks and show that investors with higher IQs display better stock
picking and lower trading costs and they are less exposed to herding and
the disposition e ect. Clark, Lusardi and Mitchell (2015) analyze pension
plan investments and show that more literate investors hold portfolios with
higher expected returns.
Our study is most closely related to Grinblatt et al. (2011), Von Gaudecker
(2015) and Clark et al. (2015), and our approach is complementary: their
analysis is essentially static, while we highlight the dynamics of household
portfolios. Our focus on rebalancing behaviors - as opposed to cross-sectional
variations in participation or risk taking - provides new insights into the re-
lationship between literacy and returns.
Finally, our study can serve as further motivation for the recent theo-
retical literature on the e ects of nancial literacy. In particular, Lusardi,
Michaud and Mitchell (2017) calibrate a stochastic life-cycle model in which
individuals endogenously choose their investment in nancial knowledge.
They show that di erences in nancial literacy amplify di erences in wealth
accumulation patterns and are a key determinant of wealth inequality. More
broadly, Lusardi and Mitchell (2014) discuss theoretical approaches to nan-
cial knowledge as a human capital investment.
2 Data
We exploit three sources of data. First, we obtained data on portfolio choices
from a large French nancial institution. Second, we constructed the returns
of these portfolios. The third source is a survey that we designed and ad-
ministered to the same clients. These data are also employed in Bianchi and
Tallon (2016), who focus on the e ects of ambiguity and risk preferences.
7
See also Gerardi, Goette and Meier (2013) on the relationship between numerical
ability and mortgage default rates, Agarwal and Mazumder (2013) on the relationship
among math ability, credit card usage and home loan applications and Agarwal, Ben-David
and Yao (2017) on mistakes in mortgage decisions and (proxies for) nancial sophistication.
5
2.1 Investment Data
We observe portfolio data for 511 clients at a monthly frequency from
September 2002 to April 2011. These data describe the value and com-
position of clients' holdings of an investment product called assurance vie.
A typical assurance vie contract (which, despite the name, has no insurance
component) establishes the types of funds in which the household wishes to
invest and the amount of wealth allocated to each fund. A key distinction
is between relatively safe vs. relatively risky funds. The rst assets, which
are called euro funds, are basically bundles of bonds, mostly (French) gov-
ernment bonds. Their returns are rather stable, and the capital invested is
guaranteed by the company.
The second funds are shares of mutual funds called uc funds. Investors
do not observe the exact composition of these funds, and they typically
do not directly select the funds in their contracts. They choose among
pre-de ned portfolios with broadly de ned risk characteristics (for example,
"aggressive" vs. "conservative" or "Europe" vs. "Emerging Markets").
It is however made clear to investors that allocating wealth to uc funds
provides higher expected returns and greater risk. To give a sense of the
trade-o , the euro funds in our sample experienced average returns of 0:38%
per month, compared to the 0:43% experienced by uc funds, and the former
have a standard deviation of 0:42% compared to 2:8% for uc funds. In Figure
1, we plot the average return of euro funds and uc funds in each month of
our sample to highlight that euro funds provide more stable returns. In the
following analysis, we will simply refer to euro funds as riskless assets and
to uc funds as risky assets.
Over time, clients are free to change the composition of their portfolios,
make new investments and liquidate their contracts in part or in full as they
wish. There is some incentive not to liquidate the contract before 8 years
to secure reduced taxes on capital gains. Investors may also delegate the
rebalancing of their portfolio according to some pre-speci ed rule.8 In our
sample, less than 10% of investors have chosen this option. As we show, our
results are not a ected by these considerations.
Assurance vie contracts are widespread in France, and they are the most
common way in which households invest in the stock market. According to
the French National Institute for Statistics (INSEE), 41% of French house-
holds held at least one of these contracts in 2010.9 These contracts can
represent a sizable fraction of households' nancial wealth. In our sample,
the average value of a portfolio is 32; 700 euros and the maximum is 590; 000
8
Speci cally, clients can require the company to hold the fraction of uc funds relative
to euro funds constant over time or to automatically increase the share of euro funds in
the portfolio.
9
This makes assurance vie the most widespread nancial product after livret A, a
savings account with returns that are set by the state. See INSEE Premiere n. 1361 -
July 2011 (http://www.insee.fr/fr/ c/ipweb/ip1361/ip1361.pdf).
6
euros. On average, that corresponds to approximately 50% of a household's
nancial wealth and approximately 10% of its total wealth.
The portfolio data we obtained from the company include a fund iden-
ti er that can be used to match the corresponding fund in Datastream. In
our sample, we observe 151 distinct euro funds and 150 distinct uc funds.
We obtain the monthly returns of each fund, which we aggregate to com-
pute the returns experienced by each client on his assurance vie contracts.
These returns are computed directly from Datastream and do not include
the management fees collected by the insurance company. These fees are
typically expressed as a percentage of the amount of capital invested, but
we have no direct information on their value in our sample.
2.2 Survey Data

Our third source of data is a survey that we designed and administered
to these clients. The survey was administered by a professional company
at the end of 2010. The sampling was designed by the survey company
following o cial INSEE classi cations to obtain a representative sample
of French households in terms of family status, employment status, sector
of employment and revenues.10 For comparison purposes, the median total
wealth in our sample is between 225 and 300 thousand euros, and the median
nancial wealth is between 16 and 50 thousand euros. These gures are in
line with those obtained for the general French population (see Arrondel,
Borgy and Savignac (2012)).11
Clients were contacted at their home phone number and asked to connect
to the internet. The survey was then completed over the internet while on
the telephone with the surveyor. The response rate was 7%, which is in
line with other studies of this type. Non-response was driven primarily by a
refusal to respond (40%), having the wrong number or respondent (26%), a
lack of internet access (18%), or the respondent not being at home (11%).12
We have no information on individuals who were contacted but did not
respond for any of the above-mentioned reasons.
10
Speci cally, the survey company obtained a sample of approximately 30; 000 clients
from the insurance company, strati ed the sample according to geographic regions (Ile
De France, North-East, West, South-East, South-West) and then implemented the sur-
vey to meet pre-speci ed quotas of respondents in terms of the above-mentioned socio-
demographic characteristics.
11
For o cial and comprehensive data, see the 2010 Household
Wealth Survey from the French National Institute for Statistics
(http://www.insee.fr/en/methodes/default.asp?page=sources/ope-enquete-
patrimoine.htm).
12
For example, Clark et al. (2015) report a response rate of approximately 17% for
a sample of 16,000 employees. Riedl and Smeets (2017) contacted approximately 38,000
investors and obtained response rates of 8% for conventional investors and 12% for socially
responsible investors. In both these cases, subjects were contacted via email as opposed
to our approach of contacting them over the phone.
7
The survey serves two main purposes. First, we wish to gather informa-
tion on demographic characteristics, wealth and portfolio holdings outside
the company. While we do not observe detailed information on the nancial
products held outside the company, the survey helps us to obtain a broader
picture of clients' nancial activities. Second, we wish to have an idea of
clients' behavioral characteristics. In particular, we focus on measures of
clients' nancial literacy. In the next section, we describe these measures in
greater detail. Summary statistics of the variables employed in our analysis
appear in Table 1.
3 Financial Literacy
Our main measure of nancial literacy is based on the answers to a series
of questions related to (basic) principles of household nance. The measure
follows the spirit of the methodology proposed by Lusardi and Mitchell
(2008) and adds some questions that are more speci c to our institutional
setting.
Subjects were given seven questions, detailed in the Appendix, which
cover various aspects of nancial sophistication: the ability to compute com-
pound interest, knowledge of nancial products, information about market
trends, and math ability. We de ne the variable Financial Literacy as the
number of correct answers to these questions. The variable takes values
between 1 and 7; with an average of approximately 4:5 and a standard de-
viation of approximately 1:5.13
We conduct our main analysis with this aggregate measure of nancial
literacy. In the Online Appendix, we consider its various components in
isolation and investigate their correlation (which is typically positive, as
expected), as well as their separate e ects on nancial behaviors. We also
discuss the robustness of our ndings when considering alternative measures
based on a subset of these questions.
In column 1 of Table 2, we report the correlation between Financial Lit-
eracy and a set of demographic variables that will serve as controls through-
out the subsequent analysis. Financial Literacy is positively correlated with
Education, Income and Wealth. It is negatively correlated with Married and
Female. Comparing the magnitude of the e ects (scaling for the standard
deviation of the corresponding variables), we observe that, somewhat intu-
itively, Education and Wealth display the largest e ects.
These correlations are consistent with other ndings in the literature.
Guiso and Jappelli (2008) show that nancial literacy is positively correlated
with education, income and wealth and negatively correlated with being
female. Almenberg and Dreber (2015) and Fonseca, Mullen, Zamarro and
13
Speci cally, 1.6% of respondents score 1; 8.8% score 2; 17.8% score 3; 24.3% score 4;
19.2% score 5; 21.5% score 6; and 6.8% score 7.
8
Zissimopoulos (2012) document the gender gap in nancial literacy. We
refer to Lusardi and Mitchell (2014) for an exhaustive discussion of these
relationships.14
In column 3, we consider a measure of perceived literacy. After the
above-mentioned questions, we asked subjects to rank their performance (in
terms of correct answers) relative to the other respondents. The resulting
variable, Subjective Literacy, is positively associated with our objective mea-
sure of nancial literacy, suggesting that subjects tend to hold a consistent
perception of their ability to answer these questions. This is in line with
Van Rooij et al. (2011), who nd a positive correlation between objective and
self-reported measures of nancial sophistication among Dutch households.
Our survey also allows us to explore the correlation between Financial
Literacy and preferences over risk, ambiguity and time. In Appendix 7.1,
we provide a detailed description of how these variables are constructed. In
column 3, we consider preferences over risk and ambiguity. We observe no
signi cant relationship with nancial literacy. In column 4, we consider the
relationship with time preferences. The relationship between Impatient and
Financial Literacy is negative (t-stat equal to 1:78).
Finally, we explore the relationship between nancial literacy and nan-
cial behaviors as elicited in the survey. In column 5, the dependent variable
Stock Hold equals one if the household reports holding stocks (either directly
or indirectly) in its global portfolio. This is the case for 34% of our respon-
dents. Our estimate shows that an additional unit of nancial literacy is
associated with a 3:5% increase in the probability of holding stocks.
In column 6, the dependent variable Fin Products is based on the num-
ber of di erent nancial products (e.g., individual stocks, bonds, mutual
funds) held by the household (again, we refer to Appendix 7.1 for details).
We observe a positive relationship between nancial literacy and Fin Prod-
ucts. These results are consistent with several studies documenting that
more nancially sophisticated households exhibit greater stock market par-
ticipation (Christelis et al. (2010), Van Rooij et al. (2011), Grinblatt et al.
(2011), Arrondel et al. (2015)).
In the next analysis, we focus on nancial behaviors observed in our
administrative data so as to explore in greater detail the relationship among
nancial literacy, portfolio choices and portfolio returns.
14
We notice that our measure of nancial literacy is consistent not only with other
ndings in the literature, but also with related measures obtained in a representative
sample of French households. As reported in <cite>arrondel2015stockholding</cite>,
48% of respondents in such sample correctly answered a question on compound interest.
We have asked the same question for our measure of nancial literacy (see Question 1 in
the Appendix) and obtained 53% correct answers.
9
4 Portfolio Returns
We examine whether nancial literacy relates to the returns that households
experience in their portfolios. In Figure 2, we plot annual returns as a func-
tion of nancial literacy, both non-parametrically (through local polynomial
regressions) and after imposing a linear t. The relationship is clearly pos-
itive, although, of course, only suggestive. We then turn to the following
regression:
0 0
ri;t = + li + i + i;t 1 + t + "i;t ; (1)
in which ri;t denotes the returns on the portfolio held by individual i in
0
month t, i includes a set of standard demographic variables (age, gender,
0
education, marital status, income, wealth), i;t 1 includes portfolio char-
acteristics (such as its riskiness), as measured before portfolio returns, and
t are month-year xed e ects. Our main coe cient of interest is ; which
describes the relationship between the survey measure of nancial literacy
li and portfolio returns. To allow for possible correlations over time, we
cluster standard errors at the individual level.
These results are reported in Table 3. To better relate to other works, we
report the results in terms of annual returns, which we compute as monthly
rolling windows of 12-month returns (results with monthly returns are in the
Online Appendix). In columns 1-2, the dependent variable is the portfolio
returns as in equation (1). According to the estimates in column 2, one
additional unit of nancial literacy is associated with 0:08% higher returns,
relative to an average return of 4:2%. In other words, those with the highest
level of nancial literacy experience approximately 0:5% higher returns than
those with the lowest level of literacy.
To obtain a crude measure of the monetary loss experienced by less
literate households, consider an investment of 32; 700 euros for 10 years,
which corresponds to the average amount and average duration of assurance
vie contracts in our sample. According to our estimates, the most literate
households earn approximately 4:4% annual returns and the least literate
households earn approximately 3:9% annual returns, which amounts to a
di erence of approximately 2; 360 euros on this investment.
We then explore the extent to which the previous results may be driven
by di erent exposure to risk. We consider various measures of risk. In
column 3, we control for the risky share, de ned as the value of risky assets
over the total value of the portfolio at the beginning of month t. In column
4, we control for the standard deviation of the returns in the previous 12
months. In column 5, we control for the beta of the returns, obtained by
regressing returns in the previous 12 months on the French stock market
index CAC40. We also consider higher moments of the return distribution:
In column 6, we include the skewness of the returns and the coskewness
10
relative to the French stock market index CAC40.15 The estimated impact
of nancial literacy is only slightly reduced. After controlling for risk, one
additional unit of nancial literacy is associated with approximately 0:07%
higher returns, which corresponds to a 0:4% di erence between the most
and least literate households. These magnitudes are comparable to those
reported in Von Gaudecker (2015), who shows that the least sophisticated
households lose approximately 50 bps per year, and to those of Clark et al.
(2015), who report a di erence of 3.5 bps per month between households
with high vs. low literacy.
In Table 4, we report a series of robustness checks. In column 1, we
consider the e ect of the recent nancial crisis. The dummy Crisis equals
one for months between October 2007 and February 2009, corresponding to
the so-called bear market of 2007-09. We observe no signi cant interaction
between Crisis and nancial literacy; in particular, the relationship between
literacy and returns holds outside the crisis period. In the Online Appendix,
we provide further evidence that more literate households did not exhibit
systematically di erent behaviors in their assurance vie contracts during the
crisis.
We then consider the possibility of delegated portfolio management. The
dummy Delegate equals one if the client has opted for delegated management
in at least one contract. We nd no signi cant relationship between Delegate
and nancial literacy (results reported in the Online Appendix). In column
2, we observe no di erential impact of literacy depending on whether the
management is delegated; in particular, our results hold for those clients
(approximately 90% of the sample) who do not choose this option.
Turning to the e ects of the duration of the contract, we construct the
dummy Duration that equals one if the client holds no contract younger
than 8 years. As mentioned previously, assurance vie contracts bene t from
reduced taxes on capital gains after 8 years. In column 3, we observe that the
interaction with nancial literacy does not show any signi cant di erence
along this dimension. We then consider whether the e ect is heterogeneous
depending on the fraction of wealth invested in these contracts. The variable
Fraction is de ned as the value of the contracts held within the company over
the value of wealth that the household reports in the survey.16 This variable
can be considered a rough measure of how representative these contracts
are relative to the rest of a household's assets. We show that there is no
relationship between Fraction and literacy (in the Online Appendix) and
15 3 3
We measure the skewness as E[(r r ) = r ], where r and r are the mean and the
standard deviation, respectively, of the returns r in the previous 12 months. We measure
2
the coskewness as E[(r r) ( )= 2r ]; where and are the mean and the standard
deviation, respectively, of the French stock market index in the previous 12 months.
16
Speci cally, Fraction is the value of the portfolio held in the company as of August
2010 (around the time when the survey was conducted) and the client's total wealth, which
we estimate as the midpoint in the reported interval.
11
that our estimates do not signi cantly di er depending on the fraction of
wealth invested in the company (column 4).
Finally, we consider the e ect of alternative clustering of standard errors.
In particular, we allow observations to be correlated both across individuals
at a given point in time (which is also why equation (1) includes time xed
e ects) and for a given individual over time. In column 5, we report standard
errors clustered both by individual and by time following the procedure
suggested by Petersen (2009), and our estimates are unchanged.
Overall, the ndings in Tables 3 and 4 show that more nancially literate
households earn higher returns on their portfolios and that higher risk taking
can only partly explain this relationship. In the next section, we more
explicitly explore household portfolio choices.
5 Portfolio Choices
We investigate three main dimensions of portfolio choices. The rst is how
much risk households take, possibly in relation to market returns. The
second is how frequently households adjust their risky position, possibly
in relation to the returns experienced on their own portfolios. The third
is, conditional on rebalancing, in what direction do households move their
wealth? The analysis serves two main purposes. First, we wish to highlight
how speci c nancial choices help us to understand the relationship between
literacy and returns that we uncovered in the previous section. Second, we
wish to provide direct evidence on whether some speci c nancial choices,
which the literature regards as associated with low nancial sophistication
(e.g., inertia and trend chasing), are actually more likely to be observed
among households with low nancial literacy.
5.1 Risk Taking

We begin by considering how nancial literacy a ects overall risk exposure.
The estimates shown in Table 5 derive from the same baseline speci cation
as in equation (1) but with di erent dependent variables. In column 1, we
observe no signi cant relationship between nancial literacy and the risky
share in household portfolios. The same pattern emerges when considering
the standard deviation of the returns (column 2) or the beta of the returns
(reported in the Online Appendix). We do not nd evidence that, overall,
households with higher nancial literacy choose riskier portfolios.
This leads us to investigate whether risk taking varies with market con-
ditions, in particular, whether households hold riskier positions when the
market returns of the risky assets are expected to be higher. In this ex-
ercise, we use realized returns in period t as a proxy for expected returns
in period t, given the information available at the end of t 1. To avoid
any mechanical relationship between the risky share and portfolio returns
12
(whereby, for example, the risky share tends to increase after high returns),
the risky share is measured before portfolio returns. Speci cally, we measure
the risky share on the last day of month t 1; while the returns in period t
account for changes in the value of the funds between the rst and the last
day of month t. For example, the risky share is computed as of December
31st and the returns correspond to the period January 1st-31st. In this
way, as con rmed in the Online Appendix, we can rule out any mechanical
relationship between the two.
We rst provide descriptive evidence. For each month, we compute the
average risky share for households with nancial literacy above the median
in our sample (equal to 4) and the average risky share for those with nan-
cial literacy below the median. The di erence between the two de nes the
variable Di erence in Risky Share, which measures the di erence in risk ex-
posure between more literate and less literate households at the end of t 1.
We also construct the variable Market Returns as the di erence between
the average monthly return of risky assets and that of riskless assets at t: In
Figure 3, we plot Di erence in Risky Share and Market Returns over time.
We observe that the two curves tend to move together, suggesting that more
literate households hold a relatively larger risky share when expected returns
are higher. Similarly, Figure 4 plots Di erence in Risky Share as a function
of Market Returns and also suggests a positive relationship between the two.
We explore this pattern more systematically in columns 3 and 4 of Table
5. We are interested in the interaction term Literacy*Mkt Returns, which
measures how the di erence in risk exposure between more and less so-
phisticated households varies with expected market returns. The estimated
coe cient is positive, showing that more sophisticated households take more
risk than less sophisticated households when expected returns are higher.
In columns 5 and 6, we report the same regressions in changes instead of
levels. The dependent variable is the change in the risky share relative to the
previous month, and the variable Change Market Returns is the change in
risky returns relative to the previous month. According to these estimates,
a 1% increase in Market Returns is associated with a 2% increase in the
risky share for each additional unit of nancial literacy.
These results suggest that one way in which more sophisticated house-
holds experience higher returns is by holding a greater exposure to risk when
expected market returns are higher. This complements the ndings in Grin-
blatt et al. (2012), who show that investors with lower IQs tend to enter
the stock market when returns are low, and with Guiso and Viviano (2015),
who show that investors with higher nancial literacy were more likely to
exit the stock market just before the 2008 crash.
13
5.2 Inertia
We further investigate how the dynamics of households' portfolios vary with
nancial literacy. In particular, we consider how much of the observed
change in risk exposure is driven by active rebalancing on the part of the
household as opposed to passive changes induced by di erent returns of risky
vs. riskless assets.
Inertia has been widely documented (Agnew, Balduzzi and Sunden (2003),
Madrian and Shea (2001), Ameriks and Zeldes (2004), Brunnermeier and
Nagel (2008)), and it is typically considered the result of low nancial abil-
ity (Calvet et al. (2009a), Graham et al. (2009), Bilias et al. (2010)). Calvet,
Campbell and Sodini (2009b) directly consider a lack of portfolio rebalancing
as a measure of a lack of sophistication. Our data allow us to provide direct
evidence on the relationship between nancial sophistication and portfolio
inertia.
Denote by Xi;t 1 the risky share of individual i in month t 1. If ri;t rf
is the realized excess return of risky assets for individual i between t 1 and
t; the passive share is de ned as
P (1 + ri;t )Xi;t 1
Xi;t = : (2)
1 + rf + (ri;t rf )Xi;t 1
If we observe that the risky share moves from Xi;t 1 to Xi;t ; we de ne the
passive change as
P P
Xi;t = Xi;t Xi;t 1 ; (3)
the active change as
A P
Xi;t = Xi;t Xi;t ; (4)
and the total change as
P A
Xi;t = Xi;t + Xi;t :
A structural model developed by Calvet et al. (2009a), which we follow

closely in the subsequent analysis, allows us to derive measures of inertia
by observing the evolution of Xi;t P and A : The model assumes that
Xi;t
households di er in their speed of adjustment between the passive risky share
and an unobservable target share. Under some assumptions (detailed in the
Online Appendix), structural parameters such as the speed of adjustment
can be conveniently estimated in the following equation:
0 0
xi;t = at + b0 xPi;t + b wi;t xPi;t + c0t wi;t + wi;t Dt wi;t + ui;t : (5)
In (5), xi;t is the change in the log risky share,
xi;t = log(Xi;t ) log(Xi;t 1 );
14
and xPi;t is the change in the log passive share,
xPi;t = log(Xi;t
P
) P
log(Xi;t 1 );
where all the changes are expressed in yearly terms. The vector wi;t may
include demographic characteristics (age, gender, education, marital status,
income, wealth) and portfolio characteristics (returns, standard deviation).
The coe cient b0 measures the fraction of the total change in the risky share
that is driven by the passive change. The greater portfolio inertia is, the
closer b0 should be to 1: Our main interest is in exploring whether port-
folio inertia varies systematically with nancial literacy, which we include
in the set of characteristics wi;t : As is clear from (5), our estimates include
only portfolios that contain some risky assets (for which Xi;t 1 and Xi;t are
positive); if Xi;t 1 = 0; the passive change in (3) is mechanically zero.
An important observation in Calvet et al. (2009a) is that OLS estimates
of b0 and b in equation (5) may be negatively biased since xPi;t and ui;t
may be negatively correlated. An instrument for xPi;t can be de ned as
xIV ^P
i;t = x xPt 1 ;
where
(1 + ri;t )XtP 1
^P = ln(
x ):
1 + rf + (ri;t rf )XtP 1
In words, xIV i;t is the (log) passive change that would be observed in the
event that the household did not rebalance in period t 1. As expected,
given partial rebalancing, xIV i;t is indeed highly correlated with xPi;t . The
key assumption for the validity of the instrument is that the returns ri;t are
uncorrelated with the error term.
We report our results in Table 6. In column 1, the OLS estimate of
equals 0:38; in column 2, the IV estimate is 0:43: The latter implies that, on
average, our investors rebalance approximately 57% of their passive change
over 12 months.
Our estimates are comparable to those obtained by Calvet et al. (2009a),
who employ the same method on the entire portfolio holdings of Swedish
households and report values of approximately 50%. Brunnermeier and
Nagel (2008) employ a similar speci cation using survey data on U.S. house-
holds and report a rebalancing of approximately 25% of the passive change.
They acknowledge this is likely to be an under-estimation due to the possibil-
ity of under-reporting of trades in their data.17 We analyze in greater detail
17
Regarding the above-mentioned literature on portfolio inertia, it should be noted that
we do not observe when portfolios are rebalanced, and thus, we cannot directly estimate
the frequency of rebalancing. Moreover, existing studies indicate some heterogeneity in
this frequency with respect to investment products, from active trading of individual
stocks to very infrequent trading in pension accounts (Guiso and Sodini (2013)). In terms
15
individual di erences in the direction of rebalancing in the next section.
Our main interest here is in exploring whether the average e ect masks
signi cant heterogeneity with respect to households' nancial literacy. Cal-
vet et al. (2009a) show that the e ect of passive change is larger for wealth-
ier and more educated individuals, which they interpret as re ecting greater
sophistication. Our data allow us to directly test the e ect of nancial liter-
acy, while using demographic characteristics such as wealth and education
as controls.
In columns 3-5, we interact the passive change with our measure of
nancial literacy. According to the IV estimates in column 3, each additional
unit of nancial literacy decreases the e ect of the passive change by 5:7%.
These magnitudes imply that for the least sophisticated households in our
sample (which have nancial literacy equal to 1), the passive change accounts
for approximately 64% of the total change over 12 months. For the most
sophisticated households (with nancial literacy equal to 7), the passive
change instead accounts for approximately 30% of the total change.
In column 4, we add interactions between the passive change and de-
mographic characteristics. It appears that more educated, older and female
investors display lower levels of inertia. In column 5, we add interactions
between the passive change and portfolio characteristics and nd that port-
folios that experience higher returns and higher volatility have lower inertia.
The e ect of nancial literacy remains. The higher nancial literacy is, the
lower the contribution of the passive change to the total change in risk ex-
posure. These ndings provide direct evidence that more nancially literate
households more actively rebalance their portfolios.
5.3 Rebalancing
We now explore in greater detail the direction of rebalancing. Trend-chasing
behaviors, for example, are often associated with proxies for unsophistication
such as low market experience (Goetzmann and Kumar (2008); Greenwood
and Nagel (2009); Bilias et al. (2010)). Tang (2016) shows that a large frac-
tion of traders in 401(k) accounts are na•ve momentum traders and obtain
lower performance.
We ask how, conditional on rebalancing, households move their wealth
between funds that have performed relatively well in the past and funds that
have performed relatively poorly. Consider the ratio of the active change
over the passive change,
A
Xi;t
Wi;t = P
; (6)
Xi;t
where P and
Xi;t A are de ned in equations (3) and (4), respectively.
Xi;t
of horizon, assurance vie products are somewhere in between (their average duration is
approximately 10 years).
16
A positive ratio indicates that an investor is chasing trends in the sense of
investing a larger fraction of his wealth in funds that have performed better
in the past. When Wi;t 2 [ 1; 0); instead, the investor is rebalancing his
portfolio to compensate for the uctuations in the risky share induced by
market trends. We say that such an investor acts as a rebalancer.
The rebalancing behavior a ects how the risky share Xi;t evolves over
time. In the limit, when Wi;t = 1; the household would display a constant
risky share. In Figure 5, we plot the change in risky share Xi;t over time
(through local polynomial regressions): We divide the sample in two: The
solid line refers to households with nancial literacy below the median in
the sample; the dotted line refers to households with nancial literacy below
the median. We observe that more literate households tend to display lower
uctuations in their risky share, suggesting that they may be more likely to
act as rebalancers.
We investigate this further in Table 7. In column 1, the dependent
variable Rebalancer is a dummy equal to one if Wi;t 2 [ 1; 0) and zero oth-
erwise. Our estimates show a positive relationship between nancial literacy
and the probability of being a rebalancer. In magnitude, an additional unit
of nancial literacy increases this probability by 1% relative to an average
of 30%.
The rebalancing decision may depend on expectations about future re-
turns, which may in turn be a ected by experienced returns. For example,
Hurd, Van Rooij and Winter (2011) show that recent market uptrends raise
expectations about future market returns; Vissing-Jorgensen (2004) docu-
ments how households change their expectations in response to their own
portfolio returns. As a measure of market trends, in column 2, we include
instead of time dummies the variable Change Market Returns, as de ned
above. As a measure of own portfolio returns, in column 3, we include Pas-
sive Change, as de ned in equation (3). Passive Change is positive when
ri;t > rf ; that is, when the household has experienced positive excess returns
in its portfolio. We observe that, consistent with the literature, investors
are less likely to act as rebalancers when they experience positive excess
returns and when market trends are positive. The e ect of nancial literacy
is, however, unchanged: More literate households are more likely to act as
rebalancers.
Finally, we investigate whether, by rebalancing, more sophisticated house-
holds earn higher returns. We compare the return experienced in month t
with the passive returns in month t; de ned as the return that the house-
hold would have experienced had it not rebalanced its portfolio. The vari-
able Higher Returns is a dummy equal to one if experienced returns exceed
passive returns and to zero if experienced returns are lower than passive
returns.
As shown in column 4, one additional unit of nancial literacy increases
the probability that experienced returns exceed passive returns by 1:2%,
17
relative to an average of 61%. In column 5, we consider the possibility that
higher returns are determined by an increased exposure to risk. Speci cally,
the dummy Higher Risk equals one if the risky share exceeds the passive
share (as de ned in (2)). Intuitively, Higher Risk is positively associated
with Higher Returns; the e ect of nancial literacy is, however, unchanged.
We also show, in column 6, that the results are not a ected by excluding
households with Xi;t 1 equal to 0 or 1, for which the passive change is
mechanically equal to 0. These results suggest that households with higher
nancial literacy are more likely to buy assets that provide higher returns
than the assets that they sell.
6 Conclusion
In this paper, we have exploited a unique dataset in which administrative
panel data on portfolio choices are combined with survey measures of -
nancial literacy. We have provided a new set of results on the relationship
among nancial literacy, portfolio choices and returns, emphasizing in par-
ticular how more and less sophisticated investors display distinct portfolio
dynamics.
Our analysis lacks an exogenous variation in nancial literacy that would
allow us to cleanly establish its causal e ects. One may argue, for example,
that individuals who are particularly lucky or unlucky in their investments
are induced to acquire nancial literacy, meaning that the causality would go
from returns to literacy. We note, however, that the more literate households
in our sample do not experience more extreme returns in the period before
our survey (see the Online Appendix). Our data also allow us to control for
nancial wealth, which may help to reduce issues of reverse causality (Clark
et al. (2015)), and more generally for a broad set of demographic charac-
teristics that may be correlated with the incentives to invest in nancial
literacy (Lusardi et al. (2017)). Our estimates are typically strengthened
by the inclusion of these controls. Finally, several studies have employed
various instruments for nancial literacy and shown that IV estimates con-
rm (and sometimes strengthen) the case for a causal relationship between
literacy and returns.18
The aim of this study has been to uncover novel mechanisms relating
nancial literacy to nancial outcomes. In this way, we believe that our
results can inform the substantial policy debate on the e ects of nancial
education (Greenspan (2002); Bernanke (2006); Schuchardt, Hanna, Hira,
Lyons, Palmer and Xiao (2009); Willis (2011)).
18
See Behrman, Mitchell, Soo and Bravo (2012) and Cole, Paulson and Shastry (2014)
for recent contributions and Lusardi and Mitchell (2014) for a review
18
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7 Appendix
7.1 Description of variables
Financial Literacy
The variable Financial Literacy equals the number of correct answers to
the following questions:
1) Suppose that you have 1000 e in a savings account that o ers a return
of 2% per year. After ve years, assuming that you have not touched your
initial deposit, how much would you own? a) Less than 1100e; b)
Exactly 1100e; c) More than 1100e; d) I don't know.
2) Livret A are used to nance social housing.
3) In 2008, the value of the CAC 40 Index of the largest listed companies
decreased by more than 50%.
4) The value of the CAC 40 Index increased during 2009.
22
5) A share gives the right to xed revenue.
6) Assurance vie contracts bene t from special scal treatment.
7) 40 divided by one-half, plus 10 equals 30.
For questions 2-7, the choice was among a) True; b) False; and c) I don't
know. The correct answers were (c), (a), (b), (a), (b), (a), and (b), respec-
tively. The percentages of correct answers were 53%, 57%, 62%, 63%, 89%,
84%, and 38%, respectively. We refer to the Online Appendix for a discus-
sion of these questions and for alternative measures of nancial literacy.
Subjective Literacy
The variable is based on the following question: "In terms of correct
answers, do you think that you are above or below the average of the other
respondents?" The variable Subjective Literacy takes the value 1 if the sub-
ject declared "above the average", 0 if he declared "average", and 1 if he
declared "below the average."
Risk Aversion
The variable is based on the following questions: "You have two options:
(a) win 400 euros for sure vs. (b) win 1000 euros with a 50% chance and
zero otherwise. Which one would you choose?" If (a) is chosen, we o er a
choice between (c) win 300 euros for sure vs. (d) win 1000 euros with a 50%
chance and zero otherwise. If (b) is chosen, we instead o er a choice between
(e) win 500 euros for sure vs. (f) win 1000 euros with a 50% chance and
zero otherwise. We construct the variable Risk Aversion that takes value 4
if (a) and (c) are chosen, 3 if (a) and (d) are chosen, 2 if (b) and (e) are
chosen, or 1 if (b) and (f) are chosen.
Ambig Aversion
The variable is based on the following questions: "You have two options:
(a) win 1000 euros with a completely unknown probability vs. (b) win 1000
euros with a 50% chance and zero otherwise. Which one would you choose?"
If (a) is chosen, we propose (c) win 1000 euros with a completely unknown
probability vs. (d) win 1000 euros with a 60% chance and zero otherwise.
If (b) is chosen, we propose (e) win 1000 euros with a completely unknown
probability vs. (f) win 1000 euros with a 40% chance and zero otherwise.
We construct the variable Ambig Aversion that takes value 1 if (a) and (c)
are chosen, 2 if (a) and (d) are chosen, 3 if (b) and (e) are chosen, or 4 if
(b) and (f) are chosen.
Impatient
The variable is based on the following question: "You can choose be-
tween 1) 1000 euros now; 2) 1020 euros in a month. Which one would you
choose?" The variable Impatient is a dummy equal to 1 if 1) was chosen.
23
Education
The variable takes value 1 if no formal education is reported, 2 refers to
vocational training, 3 refers to baccalaureat, 4 refers to a 2-year post bac
diploma, 5 refers to a 3-year post bac diploma, 6 refers to a 4-year post bac
diploma, and 7 refers to a 5-year post bac diploma or above.
Age
The variable takes value 1 if the respondent is less than 30 years old, 2
refers to between 30 and 44 years old, 3 refers to between 45 and 64 years
old, and 4 refers to 65 years or older.
Income
Monthly net revenues of the household (in euros). A value of 1 corre-
sponds to less than 1000, 2 indicates between 1000 and 1499, 3 indicates
between 1500 and 1999, 4 indicates between 2000 and 2999, 5 indicates be-
tween 3000 and 4999, 6 indicates 5000 and 6999, 7 indicates between 7000
and 9999, and 8 indicates over 10,000.
Wealth
Total wealth of the household (in euros). A value of 1 corresponds to less
than 8000, 2 indicates between 8000 and 14,999, 3 indicates between 15,000
and 39,999, 4 indicates between 40,000 and 79,999, 5 indicates between
80,000 and 149,999, 6 indicates between 150,000 and 224,999, 7 indicates
between 225,000 and 299,999, 8 indicates between 300,000 and 449,999, 9
indicates between 450,000 and 749,999, 10 indicates between 750,000 and
999,999, and 11 indicates over 1 million.
Fraction
Value of the portfolio held in the company as of August 2010 over the
client's total wealth, estimated as the midpoint in the reported interval,
except for the highest interval for which we consider the minimum of the
interval.
Stock Hold
The variable is based on the following question: "Do you hold stocks in
your portfolio?"
Fin Products
The variable Fin Products is equal to the number of di erent nan-
cial instruments held by the household. It is based on the following ques-
tion: "Which of the following nancial products do you hold? 1) Stocks
(except PEA); 2) Bonds (except PEA); 3) PEA (securities account with s-
cal bene ts); 4) Livret A (savings products with publicly xed returns); 5)
CEL/PEL (savings accounts with preferential mortgage rates); 6) Other sav-
ing accounts; 7) Retirement plans; 8) Employee savings plans; 9) Assurance
vie; 10) Mutual funds (except PEA); and 11) Other placements."
24
7.2 Figures
Figure 1: Returns of UC and Euro Funds
Note: This gure plots the average monthly returns of euro funds and uc funds in our
sample period, from September 2002 to April 2011.
25
Figure 2: Financial Literacy and Portfolio Returns
Note: This gure plots annual returns (in %) over our 1-7 index of nancial literacy.
The middle solid line corresponds to linear estimates, the upper and lower solid lines draw
the 95% con dence interval. The dotted line corresponds to non-parametric estimates
through local polynomial regressions (local-mean smoothing estimated with the Epanech-
nikov kernel and the rule-of-thumb bandwidth.)
26
Figure 3: Risk Taking and Market Returns over time
Note: This gure plots Di erence in Risky Share and Market Returns in our sample
period, from September 2002 to April 2011. Di erence in Risky Share is the di erence
between the average risky share at the end of month t-1 for households with nancial
literacy above the median in our sample (equal to 4) and the average risky share for those
with nancial literacy below the median. Market Returns is the di erence between the
average return of risky assets and that of riskless assets at month t.
27
Figure 4: Risk Taking and Market Returns
Note: On the vertical axis, Di erence in Risky Share is the di erence between the average
risky share at the end of month t-1 for households with nancial literacy above the median
in our sample (equal to 4) and the average risky share for those with nancial literacy
below the median. On the horizontal axis, Market Returns is the di erence between the
average return of risky assets and that of riskless assets at month t. The dots correspond
to the observed relation in our sample period, the middle solid line corresponds to the
linear t, the upper and lower solid lines draw the 95% con dence interval.
28
Figure 5: Change over Time in Risk Exposure
Note: This gure plots the change in the risky share Xi;t over time through local
polynomial regressions (local-mean smoothing estimated with the Epanechnikov kernel
and the rule-of-thumb bandwidth). The sample is split in two. High literacy refers to
households with nancial literacy above the median in our sample (equal to 4). Low
literacy refers to households with nancial literacy below the median.
29
7.3 Tables
Table 1: Summary Statistics

Variable Obs. Mean Std. Dev. Min Max
Financial Literacy 511 4.427 1.471 1 7

Subjective Literacy 502 -0.102 0.884 -1 1
Risk Averse 511 0.384 0.487 0 1
Ambig Averse 511 0.389 0.488 0 1
Impatient 511 0.654 0.476 0 1
Education 501 4.421 1.886 1 7
Married 511 0.763 0.426 0 1
Age 511 2.613 0.753 1 4
Female 511 0.472 0.500 0 1
Income 494 4.532 1.553 1 8
Wealth 469 6.885 2.467 1 11
Stock Hold 511 0.348 0.477 0 1
Fin Product 511 4.168 2.104 0 11
Fraction 438 0.103 0.137 0.0001 0.678
Portfolio Returns (in %) 39969 4.195 4.820 -63.334 84.220

Risky Share 39892 0.231 0.286 0 1
Std Dev (in %) 39430 2.378 2.455 0 59.504
Beta 40083 0.097 0.174 -0.126 1.180
Skewness 38121 -0.070 0.686 -3.606 3.606
Coskewness 37435 -0.073 0.473 -4.096 3.916
Crisis 40084 0.183 0.387 0.000 1.000
Delegate 40084 0.097 0.296 0 1
Duration 39479 0.496 0.500 0 1
Market Returns (in %) 39707 0.037 2.177 -5.179 3.996
Change in Risky Share 38827 -0.002 0.077 -1 1
Change in Market Returns 39707 0.001 0.029 -0.058 0.059
Total Change (log) 16455 -0.011 0.547 -7.752 6.709
Passive Change (log) 13957 -0.104 0.521 -7.357 6.762
Passive Change (IV) 13927 -0.106 0.486 -6.051 5.225
Rebalancer 21611 0.307 0.461 0 1
Higher Return 20531 0.613 0.487 0 1
Higher Risk 20531 0.418 0.493 0 1
Note: The table reports summary statistics for all variables used in the
regressions. A de nition of these variables can be found in the text and in
Appendix 7.1.
30
Table 2: Financial Literacy
Dep Variable Financial Literacy Stock Hold Fin Products
(1) (2) (3) (4) (5) (6)
Financial Literacy 0.035 0.167

(2.274)** (2.288)**
Subjective Literacy 0.313

(4.032)***
Ambiguity Averse 0.009

(-0.152)
Risk Averse -0.08

(-1.517)
Impatient -0.223
(-1.776)*
Education 0.15 0.115 0.147 0.146 0.025 0.074

(3.805)*** (2.947)*** (3.733)*** (3.701)*** (1.759)* (1.106)
Married -0.301 -0.258 -0.298 -0.283 -0.072 -0.16

(-1.785)* (-1.530) (-1.774)* (-1.673)* (-1.306) (-0.629)
Age 0.145 0.137 0.148 0.139 0.014 -0.328

(1.627) (1.542) (1.668)* (1.577) (0.47) (-2.591)***
Female -0.527 -0.404 -0.515 -0.508 -0.056 -0.296

(-4.106)*** (-3.080)*** (-4.014)*** (-3.945)*** (-1.278) (-1.524)
Income 0.105 0.095 0.101 0.098 0.009 0.126

(1.829)* (1.664)* (1.723)* (1.698)* (0.451) (1.391)
Wealth 0.085 0.073 0.08 0.087 0.04 0.199

(2.782)*** (2.374)** (2.623)*** (2.804)*** (4.000)*** (4.237)***
Mean Dep Var 4.427 4.427 4.427 4.427 0.348 4.168
Observations 458 452 458 458 458 458

R-squared 0.163 0.193 0.167 0.168 0.114 0.14
Note: This table reports the results of OLS regressions. A detailed description of all the variables appears
in Appendix 7.1. Robust t-statistics are in brackets. , and denotes signi cance at 10%, 5% and 1%
level, respectively.
31
Table 3: Returns and Risk
Dep Variable Portfolio Returns (in %)
(1) (2) (3) (4) (5) (6)
Financial Literacy 0.053 0.08 0.067 0.07 0.065 0.062

(1.889)* (2.611)*** (2.188)** (2.423)** (2.234)** (1.970)**
Risky Share 1.287

(3.924)***
Std Dev 0.112 0.114

(1.898)* (1.887)*
Beta 2.257
(5.281)***
Skewness -0.332
(-6.870)***
Coskewness 0.076
(0.818)
Controls No Yes Yes Yes Yes Yes

Time Dummies Yes Yes Yes Yes Yes Yes
Mean Dep Var 4.195 4.195 4.195 4.195 4.195 4.195
Number of Obs 37539 33463 33391 33013 33463 31222

Number of Clusters 509 456 456 456 456 456
R-squared 0.242 0.252 0.258 0.272 0.258 0.289
Note: This table reports the results of OLS regressions. The dependent variable is the annual
returns of the portfolio in percentage points, computed as monthly rolling windows of 12-months
returns. Risky Share is the value of the risky assets over the total value of the portfolio at the
end of the previous month. Std Dev and Skewness are respectively the standard deviation and
the skewness of the returns in the previous 12 months. Beta is obtained by regressing the returns
in the previous 12 months on the French stock market index CAC40. Coskewness measures the
coskewness between the returns and the French stock market index CAC40 in the previous 12
months. Controls include age, gender, education, marital status, income and wealth. Standard
errors are clustered at the individual level. Robust t-statistics are in brackets. , and
denotes signi cance at 10%, 5% and 1% level, respectively.
32
Table 4: Robustness
(1) (2) (3) (4) (5)
Financial Literacy 0.105 0.076 0.117 0.081 0.08

(2.228)** (2.333)** (2.214)** (2.528)** (2.584)***
Literacy*Crisis -0.141
(-0.778)
Literacy*Delegate 0.053
(-0.491)
Delegate 0.273
(-0.517)
Literacy*Duration -0.068
(-1.070)
Duration 0.18
(-0.605)
Literacy*Fraction 0.006
(-0.18)
Fraction -0.073
(-0.383)
Controls Yes Yes Yes Yes Yes

Time Dummies Yes Yes Yes Yes Yes
Mean Dep Var 4.195 4.195 4.195 4.195 4.195
Number of Obs 33463 33463 33010 33137 33463

Number of Clusters 456 456 456 447 104/456
R-squared 0.252 0.253 0.249 0.254 0.252
Note: This table reports the results of OLS regressions. The dependent variable
is the annual returns of the portfolio in percentage points, computed as monthly
rolling windows of 12-months returns. In column 1, Crisis is a dummy equal one
for the bear market of 2007-09. In column 2, the dummy Delegate equals one if
the client has opted for delegated management in at least one contract. In column
3, Duration is a dummy equal to one if the client holds no contract younger than
8 years. In column 4, Fraction is the value of the contracts over the total value of
household wealth as of August 2010. In columns 1-4, standard errors are clustered
at the individual level. In column 5, standard errors are clustered by individual
and time. Controls include age, gender, education, marital status, income and
wealth. Robust t-statistics are in brackets. , and denotes signi cance at
10%, 5% and 1% level, respectively.
33
Table 5: Risk Taking
Dep Variable Risky Share Std Dev Risky Share Change in Risky Share
(1) (2) (3) (4) (5) (6)

(0.888) (1.297) (0.885) (0.899) (0.553) (0.21)
Literacy* Mkt Returns 0.001 0.001

(2.048)** (2.121)**
Market Returns -0.002

(-1.433)
Literacy*Change Mkt Returns 0.017 0.02

(1.977)** (2.282)**
Change Market Returns 0.037

(-0.94)
Controls Yes Yes Yes Yes Yes Yes

Time Dummies Yes Yes No Yes No Yes
Mean Dep Var 0.231 2.378 0.231 0.231 -0.002 -0.002
Number of Obs 35578 35153 35244 35244 34377 34377

R-squared 0.073 0.117 0.059 0.072 0.003 0.13
Note: This table reports the results of OLS regressions. In columns 1, 3 and 4, the dependent variable is
the Risky Share, de ned as the value of the risky assets over the total value of the portfolio at the end of
t-1. In column 2, the dependent variable is the standard deviation of the returns in the previous 12 months.
In column 5 and 6, the dependent variable is the change in the Risky Share from the previous month. The
variable Market Returns is the di erence (in percentage points) between the average return of risky assets
and that of riskless assets in month t. The variable Literacy* Returns is the interaction between Financial
Literacy and Market Returns. The variable Change in Market Returns is the change in Market Returns
from the previous month, and the variable Literacy* Change Returns is the interaction between Financial
Literacy and Change in Market Returns. Controls include age, gender, education, marital status, income
and wealth. Standard errors are clustered at the individual level. Robust t-statistics are in brackets. ,
and denotes signi cance at 10%, 5% and 1% level, respectively.
34
Table 6: Change in Risk Exposure
Dep Variable Total Change log Risky Share
OLS IV
(1) (2) (3) (4) (5)
Passive Change 0.386 0.432 0.697 1.365 1.928

(43.818)*** (45.074)*** (19.287)*** (9.418)*** (10.740)***
Fin Liter * Pass Change -0.057 -0.035 -0.041

(-8.072)*** (-5.058)*** (-5.821)***
Financial Literacy -0.126 -0.13 -0.158

(-7.071)*** (-7.097)*** (-8.400)***
Education * Pass Change -0.056 -0.077

(-7.333)*** (-9.092)***
Married * Pass Change -0.021 -0.078

(-0.724) (-2.532)**
Age * Pass Change -0.166 -0.24

(-5.395)*** (-6.865)***
Female * Pass Change -0.163 -0.244

(-7.500)*** (-9.851)***
Income * Pass Change 0.001 0.011

(0.01) (1.16)
Wealth * Pass Change 0.004 0.006

(0.005) (0.005)
Returns* Pass Change -0.041

(-4.054)***
Std Dev * Pass Change -0.279

(-12.266)***

Controls Squared No No No Yes Yes
Mean Dep Var -0.011 -0.011 -0.011 -0.011 -0.011
Number of Obs 12506 12477 12477 12477 12477

R-squared 0.185 0.178 0.168 0.145 0.124
Note: This table reports the results of OLS regressions (columns 1) and IV regressions (columns 2-
5). The dependent variable is the total change in the log risky share xi;c;t . Passive Change in the
passive change in the log risky share xP i;c;t . In columns 2- 6, the instrument is the zero-rebalancing
(log) passive change xIV i;c;t . Fin Liter * Pass Change is the interaction between nancial literacy
and xP i;c;t . In columns 4 and 5, for each control variable, we include its interaction with xPi;c;t
as well as its squared value. Controls include age, gender, education, marital status, income and
wealth. In column 5, controls include also the returns and the standard deviation of the returns in
percentage points. Robust t-statistics are in brackets. , and denotes signi cance at 10%,
5% and 1% level, respectively. 35
Table 7: Portfolio Rebalancing
Dep Variable Rebalancer Higher Returns
(1) (2) (3) (4) (5) (6)

(2.298)** (2.324)** (2.255)** (2.719)*** (2.901)*** (2.479)**
Change Market Returns -0.791

(-8.280)***
Passive Change -0.814

(-9.517)***
Higher Risk 0.075 0.026

(5.759)*** (1.929)*

Time Dummies Yes No Yes Yes Yes Yes
Mean Dep Var 0.307 0.307 0.307 0.613 0.613 0.613
Number of Obs 19534 19486 19534 18638 18638 14064

Pseudo R-squared 0.103 0.003 0.114 0.102 0.105 0.158
Note: This table reports the results of Probit regressions, marginal e ects are displayed. In column 1-3,
the dependent variable is a dummy equal to one if the ratio between active change and passive change is
between -1 and 0, and zero otherwise. The variable Change in Market Returns is the change in Market
returns (de ned as the di erence in percentage points between the average return of risky assets and
that of riskless assets in month t) from the previous month. Passive Change is the passive change in
the risky share. In columns 4-6, the dependent variable is a dummy equal to one if experienced returns
exceed passive returns, and equal to zero if experienced returns are lower than passive returns. Higher
Risk is a dummy equal to one if the risky share of the contract in month t exceeds the passive share. In
column 6, the sample is restricted to households with a risky share Xi;t 1 di erent from 0 or 1. Controls
include age, gender, education, marital status, income and wealth. Standard errors are clustered at the
individual level. Robust t-statistics are in brackets. , and denotes signi cance at 10%, 5% and
1% level, respectively.
36
8 Online Appendix
8.1 Alternative Measures of Financial Literacy
Our variable Financial Literacy is based on 7 questions, some of which are
common to the rest of the literature and some of which are speci c to the
setting under study. Question 1 regards the ability to compute compound
interest and is one of the \big-three" questions proposed by Lusardi and
Mitchell (2008). Questions 2 and 6 are about knowledge of some speci c
features of livret A and assurance vie, the two most popular investment
products among French households. Livret A pays a xed interest rate that
is determined by the state, it is exempt from taxes, and there is a cap on
the amount of capital that each individual can invest. Financial institutions
need to transfer part of the money collected to the state, which uses the
proceeds to build social housing (this is what Question 2 is referring to).
This speci c feature is somewhat salient in the debate on saving instruments,
it dates back to Napoleon and is considered a way to promote livret A, as
it translates into \socially valuable" investments. Regarding Question 6, as
mentioned in the text, a speci c feature of assurance vie products (relative
to other instruments of stock market participation) is their scal treatment
that reduces the taxes on capital gains realized after 8 years from the opening
of the contract. Question 5 addresses a basic distinction between investing
in stocks as opposed to xed income products.
Questions 3 and 4 are about awareness of the French market. The idea is
that following (at least roughly) stock market trends provides useful infor-
mation that households can use to decide whether and how to adjust their
investment strategies. Including these dimensions is in line with approaches
to nancial literacy as a human capital investment (Lusardi et al. (2017)),
and it seems particularly important in our setting, which focuses on portfolio
dynamics.
Question 7 is simple arithmetic and is motivated by previous studies on
math ability and nancial behaviors (e.g., Gerardi et al. (2013), Agarwal
and Mazumder (2013)). However, nancial literacy is distinct from math
ability (Lusardi and Mitchell (2014)). In fact, as shown below, our measure
of nancial literacy would be even stronger if we removed Question 7 (which
in our case could be viewed mostly as adding noise).
Based on these considerations, we construct several alternative measures
of nancial literacy. Financial Literacy (2) is based on the correct answers
to Questions 1-6, excluding Question 7 on math ability. Financial Literacy
(3) is based on the number of correct answers to Questions 1 (on compound
interest) and 5 (on stock investment). These questions do not depend on
our speci c context.
Alternatively, one could construct more disaggregated measures and con-
sider the various dimensions of nancial literacy in isolation. In our ques-
37
tions, we can distinguish four dimensions and construct four corresponding
variables: Compute Interest (Question 1); Know Product (Questions 2, 5 and
6); Follow Market (Questions 3 and 4); Math Ability (Question 7). One can
then ask whether these dimensions are correlated and what their separate
contribution is to the e ects highlighted in our main analysis.
We begin with some descriptive statistics. In Table 8, we observe that
Compute Interest, Know Product, and Follow Market are signi cantly (and
positively) correlated with one another and are positively correlated with
education and wealth. The variable Math Ability is, however, not signi -
cantly related to those demographic characteristics or to other dimensions
of nancial literacy.
In Tables 9-14, we review our main results using each of the six variables
separately to shed light on which dimensions of nancial literacy are more
relevant for the main e ects presented above. We note from Tables 9 and 10
that the e ect of nancial literacy on portfolio returns is stronger if one con-
siders the measure Financial Literacy (2), which omits math ability. Among
the four disaggregated measures, higher experienced returns are essentially
driven by those with greater information about market trends (Follow Mar-
ket). The pattern of increased risk taking when expected returns are higher
is robust across the various measures of nancial literacy, and it is driven in
particular by investors who follow the market and can compute compound
interest (Table 11). All dimensions of nancial literacy are associated with
lower portfolio inertia (Table 12), although the largest e ects are for the
variables Know Product and Follow Market. The likelihood of being a re-
balancer (Table 13) is positively associated with Compute Interest and Know
Product and with the alternative measures Financial Literacy (2) and (3).
In Table 14, we observe that the probability that experienced returns ex-
ceed passive returns is positively associated with Compute Interest, Follow
Market, and Know Product and with the alternative measures Financial
Literacy (2) and (3).
38
Table 8: Descriptive Statistics
Variable Obs. Mean Std. Dev. Min Max
Financial Literacy (2) 511 4.045 1.331 1 6

Financial Literacy (3) 511 1.424 0.618 0 2
Compute Interest 511 0.534 0.499 0 1
Math Ability 511 0.382 0.486 0 1
Follow Market 511 1.249 0.679 0 2
Know Product 511 2.262 0.760 0 3
Compute Interest Math Ability Follow Market Know Product Education

Compute Interest 1
Math Ability 0.104 1
Follow Market 0.203* 0.051 1
Know Product 0.327* 0.095 0.094 1
Education 0.155* 0.113 0.149* 0.193* 1
Married 0.015 0.021 -0.061 0.053 0.006
Age 0.072 -0.051 -0.007 0.256* -0.048
Female -0.132* -0.129* -0.080 -0.109 0.105
Income 0.085 0.097 0.109 0.212* 0.506*
Wealth 0.143* 0.055 0.133* 0.301* 0.261*
Married Age Female Income Wealth

Married 1
Age 0.025 1
Female -0.092 -0.024 1
Income 0.359* 0.073 -0.043 1
Wealth 0.178* 0.377* -0.133* 0.478* 1
Note: This table reports descriptive statistics as well as pairwise correlations between our disaggregated
measures of nancial literacy. Financial Literacy (2) is the number of correct answers to questions 1-6.
Financial Literacy (3) is the number of correct answers to questions 1 and 5. Compute Interest is the
ability to compute compound interests (see question 1 in the de nition of Financial Literacy, Appendix
7.1); Know Product relates to the understanding of simple nancial products (questions 2, 5 and 6); Follow
Market captures whether subjects know of (basic) trends in nancial markets (questions 3 and 4); Math
Ability is on the ability to perform basic algebra (question 7). denotes signi cance at 5% level.
39
Table 9: Returns
(1) (2) (3) (4) (5) (6)
Financial Literacy (2) 0.088

(2.729)***

(1.427)
Compute Interest 0.157

(1.724)*
Follow Market 0.162

(2.413)**
Know Product 0.052

(0.651)
Math Ability 0.054

(0.527)

Mean Dep Var 4.195 4.195 4.195 4.195 4.195 4.195
Number of Obs 33463 33463 33463 33463 33463 33463

R-squared 0.252 0.251 0.251 0.252 0.251 0.251
Note: This table reports the results of OLS regressions. The dependent variable is the
annual returns of the portfolio in percentage points, computed as monthly rolling windows
of 12-months returns. Controls include age, gender, education, marital status, income
and wealth. Standard errors are clustered at the individual level. Robust t-statistics are
in brackets. , and denotes signi cance at 10%, 5% and 1% level, respectively.
40
Table 10: Returns and Risk
(1) (2) (3) (4) (5) (6)

(2.357)**

(1.339)

(1.387)
Follow Market 0.13

(2.043)**
Know Product 0.056

(0.777)
Math Ability 0.071

(0.722)
Std Dev 0.112 0.114 0.113 0.111 0.114 0.114

(1.883)* (1.919)* (1.907)* (1.868)* (1.940)* (1.943)*

Mean Dep Var 4.195 4.195 4.195 4.195 4.195 4.195
Number of Obs 33013 33013 33013 33013 33013 33013

R-squared 0.272 0.272 0.272 0.272 0.271 0.271
Note: This table reports the results of OLS regressions. The dependent is the annual
returns of the portfolio in percentage points, computed as monthly rolling windows of 12-
months returns. Std Dev is the standard deviation of the returns in the previous 12 months.
Controls include age, gender, education, marital status, income and wealth. Standard errors
are clustered at the individual level. Robust t-statistics are in brackets. , and denotes
signi cance at 10%, 5% and 1% level, respectively.
41
Table 11: Risk Taking
Dep Variable Change in Risky Share
(1) (2) (3) (4) (5) (6)
Literacy(2)*Change Returns 0.021

(2.297)**
Literacy(3)*Change Returns 0.052

(2.458)**
Interest*Change Returns 0.05

(2.091)**
Follow*Change Returns 0.042

(2.360)**
Know*Change Returns 0.008

(0.428)
Math*Change Returns 0.025

(0.994)
Financial Literacy (2) -0.001

(-0.451)

(-0.319)
Compute Interest -0.001

(-1.001)
Follow Market -0.001

(-0.599)
Know Product -0.001

(-0.374)
Math Ability -0.001

(-0.478)

Mean Dep Var -0.002 -0.002 -0.002 -0.002 -0.002 -0.002
Number of Obs 34377 34377 34377 34377 34377 34377

R-squared 0.13 0.13 0.13 0.129 0.13 0.129
Note: This table reports the results of OLS regressions. The dependent variable is the change in
the Risky Share from the previous month. The variable Change in Market Returns is the change
in Market returns from the previous month, where market returns are the di erence (in percentage
points) between the average return of risky assets and that of riskless assets in month t. For each
measure of nancial literacy, we denote with *Change Returns the interaction between the measure
and Change in Market Returns. Controls include age, gender, education, marital status, income
and wealth. Standard errors are clustered at the individual level. Robust t-statistics are in brackets.
, and denotes signi cance at 10%,425% and 1% level, respectively.
Table 12: Change in Risk Exposure
Dep Variable Total Change log Risky Share
(1) (2) (3) (4) (5) (6)
Literacy(2)* Pass Change -0.071

(-8.383)***
Literacy(3)* Pass Change -0.105

(-5.561)***
Interest* Pass Change -0.047

(-2.579)***
Follow* Pass Change -0.127

(-9.437)***
Know* Pass Change -0.147

(-6.915)***
Math* Pass Change -0.042

(-2.322)**

(-5.723)***

(-2.819)***
Compute Interest -0.023

(-2.548)**
Follow Market -0.048

(-2.207)**
Know Product -0.135

(-3.619)***
Math Ability -0.023

(-2.558)**
Passive Change 0.724 0.586 0.457 0.451 0.592 0.772

(18.867)*** (18.780)*** (31.641)*** (34.586)*** (27.993)*** (14.569)***

Mean Dep Var -0.011 -0.011 -0.011 -0.011 -0.011 -0.011
Number of Obs 12477 12477 12477 12477 12477 12477

R-squared 0.167 0.17 0.177 0.177 0.175 0.161
Note: This table reports the results IV regressions. The dependent variable is the total change in the log risky
share xi;c;t . Passive Change in the passive change in the log risky share xP i;c;t . The instrument is the zero-
rebalancing (log) passive change xIV i;c;t . For each measure of nancial literacy, we denote with * Pass Change
the interaction between the measure and xP i;c;t . For each control variable, we include its interaction with xP
i;c;t
as well its squared value. Controls include age, gender, education, marital status, income and wealth. Robust
t-statistics are in brackets. , and 43 denotes signi cance at 10%, 5% and 1% level, respectively.
Table 13: Portfolio Rebalancing
Dep Variable Rebalancer
(1) (2) (3) (4) (5) (6)

(1.863)*

(2.127)**

(1.812)*
Follow Market 0.001

(0.112)
Know Product 0.017

(2.013)**
Math Ability 0.022

(1.556)

Mean Dep Var 0.307 0.307 0.307 0.307 0.307 0.307
Number of Obs 19534 19534 19534 19534 19534 19534

R-squared 0.102 0.103 0.102 0.102 0.102 0.102
Note: This table reports the results IV regressions. The dependent variable is the total
change in the log risky share xi;c;t . Passive Change in the passive change in the log
risky share xP i;c;t . The instrument is the zero-rebalancing (log) passive change xIV
i;c;t .
For each measure of nancial literacy, we denote with * Pass Change the interaction
between the measure and xP i;c;t . For each control variable, we include its interaction
with xP i;c;t as well its squared value. Controls include age, gender, education, marital
status, income and wealth. Robust t-statistics are in brackets. , and denotes
signi cance at 10%, 5% and 1% level, respectively.
44
Table 14: Higher Returns
Dep Variable Higher Returns
(1) (2) (3) (4) (5) (6)

(3.111)***

(2.030)**

(2.492)**
Follow Market 0.021

(1.936)*
Know Product 0.017

(1.874)*
Math Ability -0.01

(-0.600)
Higher Risk 0.074 0.074 0.074 0.074 0.074 0.074

(5.785)*** (5.728)*** (5.777)*** (5.745)*** (5.734)*** (5.742)***

Mean Dep Var 0.613 0.613 0.613 0.613 0.613 0.613
Number of Obs 18638 18638 18638 18638 18638 18638

R-squared 0.106 0.105 0.105 0.104 0.105 0.105
Note: This table reports the results of Probit regressions, marginal e ects are displayed. The de-
pendent variable is a dummy equal to one if experienced returns exceed passive returns, and equal to
zero if experienced returns are lower than passive returns. Higher Risk is a dummy equal to one if the
risky share of the contract in month t exceeds the passive share. Controls include age, gender, educa-
tion, marital status, income and wealth. Standard errors are clustered at the individual level. Robust
t-statistics are in brackets. , and denotes signi cance at 10%, 5% and 1% level, respectively.
45
8.2 Extra Results
Table 15: Extra Results

Dep Variable Month Ret Delegate Fraction Beta Skewness Coskewness
(1) (2) (3) (4) (5) (6)
Financial Literacy 0.005 -0.005 0.068 0.006 -0.013 -0.001

(2.031)** (0.009) (0.067) (-1.277) (-0.913) (-0.178)

Time Dummies Yes Yes No Yes Yes Yes
Mean Dep Var 0.358 0.097 0.103 0.097 -0.07 -0.073
Number of Obs 33391 35759 448 35759 33830 33359

Number of Clusters 456 458 458 457 457
R-squared 0.234 0.089 0.083 0.126 0.114 0.203
Note: This table reports the results of OLS regressions. In column 1, the dependent variable
is the monthly returns in percentage points. In column 2, the dependent variable is a dummy
equal to one if the client has opted for delegated management in at least one contract. In
column 3, the dependent variable is the value of the contracts over the total value of household
wealth as of August 2010. In column 4, the dependent variable Beta is obtained by regressing
the returns in the previous 12 months on the French stock market index CAC40. In column
5, the dependent variable is the skewness of the returns in the previous 12 months. In column
6, the dependent variable is the coskewness between the returns and the French stock market
index CAC40 in the previous 12 months. Controls include age, gender, education, marital
status, income and wealth. Standard errors are clustered at the individual level. Robust
t-statistics are in brackets. , and denotes signi cance at 10%, 5% and 1% level,
respectively.
46
Table 16: Risky Share and Portfolio Returns
Dep Variable Risky Share
(1) (2) (3) (4) (5) (6) (7)
Portfolio Returns (t-1) 1.079 1.173 1.444

(3.496)*** (3.963)*** (4.114)***
Portfolio Returns (t) 0.446 0.293 0.502

(1.582) (1.035) (1.452)
Portfolio Returns (t+1) -0.086 0.01 0.36

(-0.298) (0.036) (1.073)
Market Returns (t-1) 0.002 0.002

(3.883)*** (3.955)***
Market Returns (t) 0.0001 0.0001

(0.27) (0.783)
Controls No No No No Yes No Yes

Time Dummies No No No No Yes No No
Mean Dep Var 0.231 0.231 0.231 0.231 0.231 0.231 0.231
Number of Obs 38892 39892 38889 37994 33860 39027 34800

Number of Clusters 510 510 510 510 457 510 457
R-squared 0.001 0.001 0.001 0.002 0.071 0.001 0.058
Note: This table reports the results of OLS regressions. The dependent variable Risky Share is the value of the
risky assets over the total value of the portfolio. Portfolio Returns (t-1) are the monthly returns of the portfolio
in period t-1, Portfolio Returns (t) are the monthly returns of the portfolio in period t, Portfolio Returns (t+1)
are the monthly returns of the portfolio in period t+1. Market Returns (t-1) are the di erence (in percentage
points) between the average return of risky assets and that of riskless assets at month t-1, Market Returns (t)
are the di erence (in percentage points) between the average return of risky assets and that of riskless assets
at month t. Controls include age, gender, education, marital status, income and wealth. Standard errors are
clustered at the individual level. Robust t-statistics are in brackets. , and denotes signi cance at 10%,
5% and 1% level, respectively.
47
Table 17: Behaviors during the Crisis
(1) (2) (3) (4) (5)
Literacy*Crisis -881.082 54.33 -0.006 0.0001 -0.241

(-1.060) (0.928) (-1.538) (0.263) (-3.131)***
Financial Literacy -1520.568 -20.727 0.011 0.0001 0.152

(-1.034) (-1.176) (1.206) (-0.693) (2.412)**

Mean Dep Var 32668 211.231 0.231 -0.002 5.227
Number of Obs 33561 33113 33391 32490 33463

Number of Clusters 457 457 456 456 456
R-squared 0.093 0.028 0.079 0.131 0.118
Note: This table reports the results of OLS regressions. In column 1, the
dependent variable is the value of the portfolio held by the client. In column
2, the dependent variable is change in the value of the portfolio. In column
3, the dependent variable is the Risky Share, which is the value of the risky
assets over the total value of the portfolio. In column 4, the dependent variable
is the change in the Risky Share from the previous month. In column 5, the
dependent variable is the absolute value of the annual returns of the portfolio
(in percentage points). Literacy*Crisis is the interaction between Financial
Literacy and the dummy Crisis, which takes value one for the bear market
of 2007-09. Controls include age, gender, education, marital status, income
and wealth. Standard errors are clustered at the individual level. Robust t-
statistics are in brackets. , and denotes signi cance at 10%, 5% and
1% level, respectively.
48
8.3 A model of portfolio rebalancing
We reproduce the model proposed by Calvet et al. (2009a), which we use to
derive equation (5) in the main text. The model is based on the following
assumptions. First, the log of the risky share xi;t is a weighted average
between the log of the passive share xPi;t and the log of the (unobservable)
target risky share xi;t : Denoting by i the speed of adjustment toward the
target share, we have
P
xi;t = i xi;t + (1 i )xi;t + ui;t : (7)
Second, the speed of adjustment is a linear function of a set of observable

household characteristics wi;t ; that is,
0
i = 0 + wi;t : (8)
Third, the change in the log target share is a linear function of these char-
acteristics:
0
xi;t = 0;t + t wi;t : (9)
An advantage of the log speci cation is that xi;t can be de ned indepen-
dent of individual-speci c time-invariant characteristics. Taking the rst
di erence of (7) and using i and xi;t from (8) and (9), we obtain
0 0
xi;t = at + b0 xPi;t + b wi;t xPi;t + c0t wi;t + wi;t Dt wi;t + ui;t ; (10)
0
in which at = 0 0;t ; b0 = 1 0; b = ; ct = 0 t + 0;t and Dt = t :
This corresponds to equation (5). From (7) and (10), we can observe that
ui;t may be negatively correlated with xPi;t . A positive shock to ui;t 1 ,
for example, would reduce ui;t ; simultaneously, it would increase xi;t 1 ;
which in turn would increase xPi;t and thus increase xPi;t :
49

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Forthcoming in Journal of Finance

2.2 Survey Data

5.1 Risk Taking

A structural model developed by Calvet et al. (2009a), which we follow

In (5), xi;t is the change in the log risky share,

xi;t = log(Xi;t ) log(Xi;t 1 );

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Figure 1: Returns of UC and Euro Funds

Table 1: Summary Statistics

Financial Literacy 511 4.427 1.471 1 7

Portfolio Returns (in %) 39969 4.195 4.820 -63.334 84.220

Financial Literacy 0.035 0.167

Subjective Literacy 0.313

Ambiguity Averse 0.009

Risk Averse -0.08

Education 0.15 0.115 0.147 0.146 0.025 0.074

Married -0.301 -0.258 -0.298 -0.283 -0.072 -0.16

Age 0.145 0.137 0.148 0.139 0.014 -0.328

Female -0.527 -0.404 -0.515 -0.508 -0.056 -0.296

Income 0.105 0.095 0.101 0.098 0.009 0.126

Wealth 0.085 0.073 0.08 0.087 0.04 0.199

Mean Dep Var 4.427 4.427 4.427 4.427 0.348 4.168

Observations 458 452 458 458 458 458

Financial Literacy 0.053 0.08 0.067 0.07 0.065 0.062

Risky Share 1.287

Std Dev 0.112 0.114

Controls No Yes Yes Yes Yes Yes

Mean Dep Var 4.195 4.195 4.195 4.195 4.195 4.195

Number of Obs 37539 33463 33391 33013 33463 31222

Financial Literacy 0.105 0.076 0.117 0.081 0.08

Controls Yes Yes Yes Yes Yes

Mean Dep Var 4.195 4.195 4.195 4.195 4.195

Number of Obs 33463 33463 33010 33137 33463

Financial Literacy 0.008 0.026 0.008 0.008 0.001 0.001