007 PHD Chiara Monticone

Chiara Monticone
Financial Literacy and Financial Advice

Theory and Empirical Evidence
PhD Thesis 2011-007

Università degli Studi di Torino
Università del Piemonte Orientale
Financial Literacy
and Financial Advice:
Theory and
Empirical Evidence
Chiara Monticone
Scuola di Dottorato in Economia “Vilfredo Pareto”

Indirizzo Scienze Economiche
Università degli Studi di Torino
Università del Piemonte Orientale
Financial Literacy
and Financial Advice:
Theory and
Empirical Evidence
Chiara Monticone
Scuola di Dottorato in Economia “Vilfredo Pareto”

Indirizzo Scienze Economiche
Ciclo XXIII
Supervisore: prof. Riccardo Calcagno

Coordinatore: prof. Giuseppe Bertola / prof. Daniela Del Boca
Dipartimento di Economia “S. Cognetti de Martiis”
Dipartimento di Scienze Economiche e Finanziarie “G. Prato”
Dipartimento di Statistica e Matematica Applicata “Diego de Castro”
Dipartimento di Politiche Pubbliche e Scelte Collettive
Dipartimento di Scienze Economiche e Metodi Quantitativi
Copyright 2010
c Università degli Studi di Torino
Contents
Introduction 4
1 Financial literacy: a review on the state of research and

open issues 5
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3 Measurement issues . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4 The determinants of financial literacy . . . . . . . . . . . . . 10
1.5 Financial literacy and financial behavior . . . . . . . . . . . . 13
1.5.1 Planning and saving for retirement . . . . . . . . . . . 13
1.5.2 Pension plan participation and retirement choices . . . 14
1.5.3 Stock market participation . . . . . . . . . . . . . . . 15
1.5.4 Portfolio diversification . . . . . . . . . . . . . . . . . 15
1.5.5 Minimizing fees . . . . . . . . . . . . . . . . . . . . . . 16
1.5.6 Other aspects of financial behaviour . . . . . . . . . . 17
1.5.7 The direction of causality . . . . . . . . . . . . . . . . 18
1.6 Discussion and open issues . . . . . . . . . . . . . . . . . . . . 20
Appendix: Financial literacy tests . . . . . . . . . . . . . . . . . . 21
2 The determinants of financial literacy in Italy and the role

of household wealth 30
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2 Background on financial literacy determinants . . . . . . . . . 32
2.3 Data and descriptive evidence . . . . . . . . . . . . . . . . . . 34
2.4 Empirical strategy . . . . . . . . . . . . . . . . . . . . . . . . 36
2.4.1 Accounting for endogeneity . . . . . . . . . . . . . . . 37
2.5 Estimation results . . . . . . . . . . . . . . . . . . . . . . . . 37
2.5.1 Robustness checks . . . . . . . . . . . . . . . . . . . . 38
2.6 Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . 40
Appendix: Tables and figures . . . . . . . . . . . . . . . . . . . . . 42
v
3 Financial literacy and financial advisors: substitutes or com-
plements? 50
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
3.2 The basic model . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.2.1 Advisor’s decision about information revelation . . . . 55
3.2.2 Investor’s decision about consulting an advisor . . . . 57
3.3 Endogenous information precision . . . . . . . . . . . . . . . . 58
3.3.1 An analytical example . . . . . . . . . . . . . . . . . . 60
Appendix: Proofs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4 Financial literacy and the demand for financial advice 67

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
4.2 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
4.2.1 Financial literacy and financial advice . . . . . . . . . 70
4.2.2 Other determinants of the demand for financial advisors 72
4.3 Data and descriptives . . . . . . . . . . . . . . . . . . . . . . 73
4.4 Empirical strategy . . . . . . . . . . . . . . . . . . . . . . . . 75
4.5 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.5.1 Use of advisors and other sources . . . . . . . . . . . . 77
4.5.2 How much to rely on advisors . . . . . . . . . . . . . . 78
4.6 Robustness checks . . . . . . . . . . . . . . . . . . . . . . . . 79
4.6.1 Financial literacy indices . . . . . . . . . . . . . . . . 79
4.6.2 Financial literacy endogeneity . . . . . . . . . . . . . . 80
4.6.3 Relations with banks and brokers . . . . . . . . . . . . 82
4.6.4 Trust endogeneity . . . . . . . . . . . . . . . . . . . . 82
4.6.5 Effect of trust across financial literacy levels . . . . . . 84
Appendix: Tables and figures . . . . . . . . . . . . . . . . . . . . . 85
Bibliography 111
vi
Acknowledgements
First of all, I am deeply grateful to Riccardo Calcagno for his valuable

guidance and for the careful supervision of this work. Also, a debt of thanks
goes to Elsa Fornero for constant support and encouragement over the years,
as well as for the continuous advice.
Special thanks go to Giuseppe Bertola, Margherita Borella, Arie Mel-
nik, Giovanna Nicodano, and Alessandro Sembenelli who provided insight-
ful advice that greatly improved the quality of this work. I also would
like to thank all my CeRP and Ph.D. colleagues, in particular Flavia Coda
Moscarola, Maela Giofré, and Serena Trucchi, for precious discussions and
great patience. Facilities and technical assistance from CeRP/Collegio Carlo
Alberto and its staff are gratefully acknowledged.
Chapter 2 benefited from the comments of participants to the Networks
Financial Institute at Indiana State University conference “Improving Fi-
nancial Literacy and Reshaping Financial Behavior” (Indianapolis, May
2009), the I SAVE Conference organized by MEA (Deidesheim, June 2009),
as well as the II Italian Doctoral Workshop in Economics and Policy Analysis
at Collegio Carlo Alberto (Moncalieri, July 2009).
Stimulating discussions and valuable suggestions on chapter 3 came from
Andrea Buffa, Erwan Morellec, Marco Ottaviani and participants to the
XVIII International Tor Vergata Conference on Money, Banking and Fi-
nance (Rome, December 2009), and the Annual International Conference
on Macroeconomic Analysis and International Finance (Crete, May 2010).
Chapter 4 substantially improved thanks to the comments of participants
to the II SAVE Conference (Deidesheim, June 2010), the III Italian Doc-
toral Workshop in Economics and Policy Analysis (Moncalieri, July 2010),
the 51st Annual Conference of the Italian Economists’ Society (Catania, Oc-
tober 2010), and the XIX International Tor Vergata Conference on Money,
Banking and Finance (Rome, December 2010). Moreover, I wish to thank
Laura Marzorati at Pioneer Investments for providing access to the Uni-
credit Customers’ Survey; Federica Palermo at the Ministry of Interior for
her help with the referendum data; and the Fondazione Rodolfo Debenedetti
for making the ‘TFR Survey’ data available.
Last but not least, I thank my parents and Lorenzo for their steady
encouragement during these years.
1
Introduction
The issue of financial literacy has recently gained relevance for several rea-
sons. Social security reforms in the US and in many European countries are
placing increasing responsibility on individuals for their financial security in
old age. Workers will have to decide both how much to save for retirement
and how to allocate their retirement savings. At the same time, the com-
plexity of financial instruments is increasing and households have to deal
with new and more sophisticated financial products. Various institutions
raised their concerns about the low level of households’ financial literacy
across several countries and about the need to provide financial education
(European Commission, 2007; OECD, 2005; President’s Advisory Council
on Financial Literacy, 2008). These developments suggest the importance
of investigating the level of financial literacy, and its role in households’
financial decision making.
The first chapter is devoted to a review of the research on financial
literacy, discussing definition and measurement issues, summarizing evidence
on the determinants of financial literacy and its relation with economic and
financial behavior, and highlighting some unresolved issues that may deserve
further investigation.
The second chapter, “The determinants of financial literacy in Italy and
the role of household wealth”, examines empirically the level of financial
literacy in Italy and its determinants. It studies consumers’ characteristics
correlated with high levels of literacy, and investigates the relation between
households’ financial knowledge and financial wealth. This relation is made
more complex by the fact that, from a theoretical point of view, the direction
of causality is not entirely clear. Exploiting the 2006 wave of the Bank
of Italy’s Survey on Household Income and Wealth, the empirical analysis
studies the determinants of financial literacy and uses instrumental variables
estimation techniques in order to account for the endogeneity of financial
wealth. The empirical results indicate that wealth has a positive effect on
households’ degree of financial knowledge, even after controlling for socio-
demographics and removing wealth endogeneity.
Another aspect emerging from the review in chapter 1 is that the role
of external advice for households’ financial decisions has not yet received
much attention in financial literacy research, even though knowing “where
2
to go for help” is recognized as a key element in achieving financial well-being
(OECD, 2008). The concerns expressed by scholars and policy-makers about
the lack of financial literacy would look less worrying if the individual gaps in
knowledge were compensated by the advice of reliable and qualified sources.
The remaining chapters start from this common motivation and investigate
the issue from a theoretical and an empirical point of view, encompassing
aspects related to both the demand and the supply of financial advice.
The third chapter “Financial literacy and financial advisors: substitutes
or complements?” (coauthored with Prof. Riccardo Calcagno) deals from a
theoretical point of view with the relation between an informed intermedi-
ary facing a conflict of interest, as at the same time he provides information
to the customer and sells a risky financial product, and an investor who is
less informed than the seller about the distribution of the asset payoff. An-
alyzing the strategic communication between the two agents, we exploit the
heterogeneity of investor’s financial information in affecting the degree of
information transmission in equilibrium. We find that there are cases when
it is more profitable for the advisor not to reveal the information he pos-
sesses, and that this happens when he interacts with relatively less informed
investors. This implies that advisors are not useful to the investors who need
them the most, because they fail to be a substitute to learning by one’s self.
Moreover, if fully rational investors know the structure of advisor’s selling
incentives, advisors are visited only by sufficiently informed investors who
anticipate that they will receive meaningful information. This result implies
that only informed consumers, by consulting an advisor, pursue the most
appropriate investment decision, while the least informed may make invest-
ment mistakes and incur ex-post losses. These results are confirmed when
we allow investor’s degree of information to be endogenously determined by
her level of financial literacy.
The fourth chapter, “Financial literacy and the demand for financial
advice”, analyzes the role of financial literacy in affecting the demand for
financial advice, investigating empirically which investors seek the advice of
professionals, and to what extent they rely on it. Using the 2007 Unicredit
Customers’ Survey, this chapter verifies whether financial advisors are con-
sulted by more or less financially literate investors. The results indicate
that, even controlling for a number of factors, such as trust towards one’s
advisor, self-confidence in own financial ability, wealth and opportunity cost
of time, financial literacy significantly affects the demand for advice. First,
it is positively associated to a preference for financial advisors over informal
sources, as as previously found in the literature (Lusardi and Mitchell, 2006;
van Rooij et al., 2007). Second, financial literacy increases the probability
of consulting a financial advisor, while it decreases the likelihood of either
investing without consulting any professionals or delegating them. This is
likely the wisest choice in a context where the supply of independent fi-
nancial advice is extremely limited. These findings confirm the theoretical
3
prediction of chapter 3 that advisors are rarely consulted by investors who
need them the most, while literate consumers “know where to go for help”.
Overall, the results of chapters 3 and 4 indicate that the presence of qual-
ified but not completely independent advisors is not sufficient to counteract
the possible effects of financial illiteracy, and suggest that policy measures
reducing the private costs of acquiring knowledge and skills may be needed
to ensure sound financial decision-making.
Shortcomings and directions for future research are discussed within each
chapter.
4
Chapter 1
Financial literacy: a review

on the state of research and
open issues
1.1 Introduction
Financial literacy research in economics in relatively recent and gained grow-
ing attention mostly for its relevance for policy-making. Social security re-
forms in the US and in many European countries are placing increasing
responsibility on individuals for their financial security in old age. Workers
will have to decide both how much to save for retirement and how to allo-
cate their retirement savings. At the same time, the complexity of financial
instruments is increasing and individuals have to deal with new and more so-
phisticated financial products. These developments suggest the importance
of investigating the level of financial literacy, and its role in households’
financial decision making.1
This review aims at organizing financial literacy literature along its main
directions of research. Given the relative novelty of the theme, it is impor-
tant, before analyzing the main developments in the research on its determi-
nants and effects, to start by discussing definition and measurement issues.
The chapter is organized as follows. Section 1.2 collects the most au-
thoritative definitions of financial literacy (and related concepts) provided
by scholars and institutions. Section 1.3 discusses the advantages and short-
comings of the various measurement methodologies that have been used so
far. Section 1.4 describes the main driving factors associated with financial
1
For the sake of homogeneity, this chapter will not review evidence about developing
countries (e.g., Cole et al. (2010) on the demand for bank savings accounts in India and
Indonesia), because research questions related to developing countries are to some extent
different from those about Europe and the US, and the evidence provided is not functional
to the rest of the dissertation.
5
literacy, while Section 1.5 reviews the most important research contribu-
tions studying the effect of financial literacy on various aspects of economic-
financial behaviour. Section 1.6 concludes by highlighting some open issues
and possible directions for future research.
1.2 Definition
A striking aspect of the growing literature on financial literacy is the lack
of a clear ‘consensus’ definition.
One of the most authoritative ones is provided by the President’s Advi-
sory Council on Financial Literacy, defining financial literacy as “the ability
to use knowledge and skills to manage financial resources effectively for a
lifetime of financial wellbeing (President’s Advisory Council on Financial
Literacy, 2008)”. This definition follows the one proposed by the Jump$tart
Coalition (a coalition of US organizations providing advocacy, research, and
educational resources to improve financial literacy of school-age youth): “the
ability to use knowledge and skills to manage one’s financial resources ef-
fectively for lifetime financial security”(Jump$tart Coalition for Personal
Financial Literacy, 2007).
These definitions stress knowledge and skills as key components of finan-
cial literacy, while definitions by other institutions and scholars give more
emphasis to just some elements, or have a slightly different focus. Finan-
cial knowledge is the focus of Hilgert et al. (2003), and Lusardi (2008, p.
2) refers to “knowledge of basic financial concepts, such as the working of
interest compounding, the difference between nominal and real values, and
the basics of risk diversification”. The ability to make informed judgments
is highlighted by the UK National Foundation for Educational Research and
the surveys carried out by the Australia and New Zealand Banking Group,
defining financial literacy as “the ability to make informed judgements and
take effective decisions regarding the use and management of money (Noctor
et al., 1992; Australia and New Zealand Banking Group, 2008)” .
Finally, the UK Financial Services Authority (FSA) refers to ‘financial
capability’ rather than to financial literacy, where “financially capable peo-
ple are able to make informed financial decisions. They are numerate and
can budget and manage money effectively. They understand how to manage
credit and debt. They are able to assess needs for insurance and protection.
They can assess the different risks and returns involved in different saving
and investment options. They have an understanding of the wider ethical,
social, political and environmental dimensions of finances (Personal Finance
Research Centre, 2005, p. 13)”. Starting from this premise, the conceptual
framework developed for the FSA report on financial capabilities in the UK
(Atkinson et al., 2006) involves other elements (such as attitudes, experi-
ence, circumstances...) in addition to knowledge and skills. On a similar
6
vein, HM Treasury states that “Financial capability is a broad concept, en-
compassing people’s knowledge and skills to understand their own financial
circumstances, along with the motivation to take action. Financially capable
consumers plan ahead, find and use information, know when to seek advice
and can understand and act on this advice, leading greater participation in
the financial service market (HM Treasury, 2007)”.
On the related issue of financial education there is more agreement

across definitions. The OECD one is: “Financial education is the process
by which financial consumers/ investors improve their understanding of fi-
nancial products and concepts and, through information, instruction and/or
objective advice, develop the skills and confidence to become more aware of
financial risks and opportunities, to make informed choices, to know where
to go for help, and to take other effective actions to improve their financial
well-being (OECD, 2005, 2008)”. Analogously, the President’s Advisory
Council on Financial Literacy defines financial education as “the process
by which people improve their understanding of financial products, services
and concepts, so they are empowered to make informed choices, avoid pit-
falls, know where to go for help and take other actions to improve their
present and long-term financial wellbeing (President’s Advisory Council on
Financial Literacy, 2008)”.
1.3 Measurement issues

Given the wide array of concepts and definitions, it is not surprising to find
substantial heterogeneity also in measurement. While most research papers
resort to objective test-based measures, the number, wording and content
of the tests used in each paper are far from homogeneous.
Before discussing tests in detail, I will spend a few words on ‘subjec-

tive’ measurement. Self-assessment of own financial knowledge and skills is
probably the easiest measure to implement in a survey and is sometimes
used as a measure for financial literacy (e.g., in Perry and Morris, 2005).
However, van Rooij et al. (2008) show that this may not be a reliable mea-
sure, because high (low) self-assessed knowledge does not correspond to high
(low) test-based knowledge in a remarkable share of their sample. More-
over, Guiso and Jappelli (2008) suggest that self-assessment about financial
knowledge is likely to be confounded with over- or under-confidence (with
over-confidence being more frequent than under-confidence). They use two
different measures of self-assessed financial knowledge, and find that the first
one is positively (but weakly) correlated to a test-based index of financial
literacy, while the second is not correlated at all.2
2
Guiso and Jappelli (2008) use two measures self-assessed financial knowledge: the
7
Most surveys try to assess the ability to understand basic economic prin-
ciples and the working of the most common financial assets by means of
tests. Even though there are similarities across some questionnaires3 , a
large variety of questions is employed, also because some studies use ad hoc
questionnaires. This is for instance the case of papers studying specific as-
pects of financial behaviour or specific assets, such as Lyons et al. (2007)
on credit literacy, Lusardi and Tufano (2008) on debt literacy, Guiso and
Jappelli (2008) on portfolio diversification, and Nöth and Puhan (2009) on
mutual funds. In all these cases the literacy questions are related to the
aspect of interest (e.g., questions on what diversification means to study the
effect of literacy on portfolio diversification). For the precise wording of the
questions used in the papers reviewed see the Appendix to this chapter.
A few remarks are necessary on what financial literacy tests are about
(and what they are not about). First, since “the ability to use knowledge
and skills to manage financial resources effectively for a lifetime of finan-
cial wellbeing (President’s Advisory Council on Financial Literacy, 2008)”
builds (also) on numerical abilities, it is quite common to include numer-
acy tests in the financial literacy tests. This is, for instance, the case of
van Rooij et al. (2007) and Lusardi and Mitchell (2007a,b). However, fi-
nancial literacy is not exhausted by numeracy, and it is debatable whether
numeracy tests alone can be used to measure financial literacy (such as the
numeracy tests in the Survey of Health, Ageing and Retirement in Europe
(SHARE)). Second, some surveys focus on the knowledge of “economic in-
dicators” (e.g., what is the current inflation rate), such as Bernheim (1998)
and European Commission (2008). Given that most studies try to capture
knowledge of basic financial principles, rather than knowing a single param-
eter, I disregard this type of measures in the current review. Finally, the
studies on financial capability concentrate on broader concepts than strictly
on knowledge of financial principles, and include – in addition to the stan-
dard quizzes on economic-financial concepts – also measures of attitudes
and behaviour (e.g., attitudes to spending money and saving, understand-
ing consumer rights, etc.). Atkinson et al. (2006) and Australia and New
Zealand Banking Group (2008) follow this approach.
Even though tests are more objective than self-assessed knowledge, they
are not free from problems. I will summarize some of the most important
first is based on the responses to a series of questions about self-assessed knowledge of 10
categories of financial instruments (i.e., “How well you think you know the characteristics
of corporate bonds?”), while the second asks “Think about your ability in managing your
portfolio. Compared to the average do you think you have superior ability, ... etc”.
3
For instance, the Italian Survey on Household Income and Wealth (SHIW) has some
questions in common with the FSA questionnaire and some in common with the Health
and Retirement Study (HRS – Module 8 2004); the German SAVE survey uses the the
HRS tests (Module 8 – 2004); the Dutch Household Survey (DHS) uses very similar tests
to the RAND American Life Panel (ALP); etc.
8
issues:
- Test-based measures are not absolute measures (i.e., defining what

people have to know to be ‘financially literate’ is not easy and involves
some degree of arbitrariness), and also when considered as relative
measures they can be problematic. In particular, comparisons between
different ‘indices’ or even different tests is hardly feasible.
- It is important whether a ‘don’t know’ option is offered or not. Not

allowing for a ‘don’t know’ option may force respondent to select a
random answer (e.g. as in the case of the early waves of the German
SAVE).
- The methodology used to build a synthetic measure of financial lit-

eracy is also important. This usually depends on the nature of the
questions (i.e., with right/wrong questions a count of correct answers
is a reasonable way to go; with questions admitting different degrees of
right/wrong questions a principal component analysis may be used, as
in Kimball and Shumway (2007); Bernheim (1998) proposed an index
for the kind of questions that can be answered right/wrong to varying
degrees).
To (partially) address these measurement issues, several surveys that

have recently added financial literacy tests for the first time in their ques-
tionnaires have opted for exactly the same set of questions in order to im-
prove comparability across samples and countries. The questions that are
establishing as the most widely used are those developed by Annamaria
Lusardi and Olivia Mitchell for the Health and Retirement Study, and later
added (at least some of them) to the SHIW, SAVE, the Dutch Household
Survey (DHS), the New Zealand Financial Knowledge Survey, etc. The tests
are:4
- Do you think that the following statement is true or false?: Buying

a single company stock usually provides a safer return than a stock
mutual fund. True | False | Don’t Know | Refused
- Suppose you had $100 in a savings account and the interest rate was
2% per year. After 5 years, how much do you think you would have
in the account if you left the money to grow: more than $102, exactly
$102, less than $102? More than $102 | Exactly $102 | Less than $102
| Don’t Know | Refused
- Imagine that the interest rate on your savings account was 1% per
year and inflation was 2% per year. After 1 year, would you be able
4
Dataset: Health and Retirement Study 2004 – Module 8. Used for the first time in
Lusardi and Mitchell (2006).
9
to buy more than, exactly the same as, or less than today with the
money in this account? More than today | Exactly the same as today
| Less than today | Don’t Know | Refused
Hung et al. (2009) exploit the occurrence of different financial literacy

tests in the RAND’s American Life Panel (ALP) to validate financial liter-
acy measures. This is because a few studies used the ALP (or sub-samples
of it) to conduct studies on financial literacy and they used different tests to
measure it. In particular, Hung and coauthors are able to use the financial
literacy tests used for Lusardi and Mitchell (2007b), Kimball and Shumway
(2007) and an additional financial literacy index built on purpose. They
show that scores are highly correlated across sub-samples and tests, indicat-
ing stability across measurement strategy. Moreover, the questions devised
for Lusardi and Mitchell (2007b) were asked again in a subsequent wave of
the ALP, with responses to the same questions in different times showing
very high correlation, indicating stability over time, at least for this group
of tests.
Finally, it is interesting to note that some authors resorted to “induced”

knowledge, rather than measuring previously acquired knowledge. For in-
stance, in Howlett et al. (2008) “to induce financial knowledge about the
nature of 401(k) plans, half the participants were presented with a 295-word
summary describing how typical 401(k) plans operate. This information was
based on information presented on an investor education Web site (p. 233)”.
This methodology may be useful to overcome endogeneity problems when
assessing the impact of financial knowledge on financial behaviour, based on
the idea that it is acquired at the time of interview and not conveyed by
experience or previous financial behaviour.
1.4 The determinants of financial literacy

The main determinants of financial literacy are organized along a few major
domains. Details of the questions used to measure financial literacy for the
papers reviewed are contained in the Appendix to this chapter.
Socio-demographic characteristics
There are some general findings that hold across different samples, coun-
tries, times: women and ethnic minorities have less knowledge, while more
educated individuals display greater financial literacy. Financial knowledge
is positively correlated to wealth and/or income.
Bernheim (1998) finds that males and whites perform better on both fi-
nancial and macroeconomic questions. Being male is associated with greater
financial knowledge also in Italy (Guiso and Jappelli, 2008), the Netherlands
10
(van Rooij et al., 2007), Australia (Australia and New Zealand Banking
Group, 2008), and in other US studies, such as Lusardi and Mitchell (2006,
2008) and Lusardi et al. (2010), using the National Longitudinal Survey of
Youth.
Ethnic minorities perform worse on financial literacy tests (Lusardi and
Mitchell, 2007a). Lyons et al. (2007) find that Hispanics are significantly less
knowledgeable than whites about credit scores and reports. In Australia,
individuals of aboriginal descent display lower financial literacy (Australia
and New Zealand Banking Group, 2008).
There is some evidence of an inverse U-shaped age profile of financial
knowledge, meaning that middle-aged adults report higher scores than both
their younger and older counterparts, without controlling for cohort effects
(Australia and New Zealand Banking Group, 2008). The initial rise with
age might be interpreted as an increase in experience, while the subsequent
decline could be the result of deteriorating cognitive functions (Agarwal
et al. (2009), controlling for cohort effects). This pattern is not confirmed
in Lyons et al. (2007), who find a slightly negative relation between age and
credit score knowledge in a sample representative of the U.S. population
aged 18 and older.
Unsurprisingly, a higher level of education is usually associated with a
better understanding of credit reports and credit scores (Lyons et al., 2007)
and a higher degree of financial knowledge in general (Australia and New
Zealand Banking Group, 2008; Bernheim, 1998; Guiso and Jappelli, 2008;
Lusardi and Mitchell, 2007a; Meier and Sprenger, 2008). In addition to
formal education, individual cognitive abilities also play a role. Delavande
et al. (2008) estimate a model where the financial knowledge score depends
on cognitive ability and other controls. As expected, ability increases the ac-
curacy of responses to financial tests, over and above the effect of education.
Family background
Lusardi et al. (2010) examine financial literacy among the young using
data from the U.S. National Longitudinal Survey of Youth (in addition to
the youth interview, the NLSY97 includes separate interviews with each
youth’s parent; the authors of this paper included a small set of financial
literacy questions in Wave 11 of the survey, fielded in 2007-2008 when re-
spondents were 23-28 years old). In addition to socio-demographics and
cognitive ability, financial literacy is influenced also by family background,
especially mother’s education, and whether parents owned stocks (either in
private wealth or retirement wealth). Note that “parental” variables refer
to the period when the (young) respondent was 12-17.
Wealth
11
Delavande et al. (2008) propose a simple theoretical framework linking
the acquisition of financial literacy to wealth, viewing the acquisition of
financial knowledge as a sort of human capital investment. Delavande and
coauthors assume that financial knowledge allows investors to obtain higher
expected rates of return on their assets, for any given level of risk, up to
a theoretical maximum on the mean-variance frontier. In analogy with the
theory of human capital, investors decide to invest in the acquisition of
financial knowledge, thereby incurring costs in terms of money, time, and
effort, to benefit from higher risk-adjusted returns on their financial assets.
In this framework, the benefit from investing in financial knowledge also
depends on the amount of assets invested, because the higher the stock of
financial knowledge possessed, the higher the rates of return obtained by the
assets. Hence, according to this model, wealthier individuals should have a
greater incentive to acquire financial knowledge.
Jappelli (2010) studies the link between economic resources and eco-
nomic literacy from a macroeconomic point of view. The dataset used for
this paper – the IMD World Competitiveness Yearbook – contains indicators
of economic literacy across the world using an executive survey in 55 coun-
tries for the 1995-2008 period. The empirical analysis shows that a country’s
level of economic literacy depends on educational achievement, social inter-
actions and the level of financial development, as proxied by mandated sav-
ing in the form of social security contributions. The contribution rate is used
as an (inverse) proxy for financial market development to minimize the risk
of reverse causation between literacy and financial development. These find-
ings can be rationalized by a standard human capital model, where financial
knowledge depends on cognitive abilities, and the incentives to accumulate
knowledge are directly related to the level of households’ resources invested
in financial markets.
Time preferences
Meier and Sprenger (2008) present the results of a field study linking
individual decisions to acquire personal financial information to time prefer-
ences. They offered a short, free credit counseling and information program
to more than 870 individuals. About 55 percent chose to participate. Inde-
pendently, the authors elicited time preferences using incentivized choice ex-
periments both for individuals who selected into the program and those who
did not. Results show that the two groups differ sharply in their measured
discount factors (controlling for other individual characteristics, including
prior knowledge about credit scoring). Individuals who choose to acquire
personal financial information through the credit counseling program dis-
count the future less than individuals who choose not to participate. This
suggest that individual time preference may explain who will and who will
not choose to become financially literate.
12
1.5 Financial literacy and financial behavior
The literature has shown that financial knowledge is related to a wide range
of financial behaviors, including wealth accumulation, stock market partici-
pation, portfolio diversification, participation and asset allocation in 401(k)
plans, indebtedness, and responsible financial behavior in general. I will
consider each of these aspects in detail, concluding the section with a discus-
sion about the direction of causality between financial literacy and behavior.
Australia and New Zealand Banking Group (2008) considers several as-
pects of financial behavior and shows (descriptively) that those in the top
20% of financial literacy scores are significantly more likely than those in the
lowest 20% scores to engage in what can be considered to be “responsible”
behaviors, such as minimizing banking fees, carrying out comparisons when
looking for financial products, and borrowing from mainstream financial in-
stitutions rather than from family or friends. Moreover, they also show
a significant relation between financial literacy and ownership of financial
assets, from investment products to insurances.
Analogously, Hilgert et al. (2003) describe (through univariate statis-
tics) the impact of financial knowledge on various aspects of financial be-
haviour such as cash-flow management (i.e., paying all bills on time, keeping
records, etc.); credit management (i.e., paying credit card balances in full
each month, comparing offers before applying for a credit card, etc.); saving
and investment (i.e., having money spread over different types of invest-
ments, having a retirement plan, etc.); and other financial experience, such
as planning and setting goals for financial future. The relationships between
specific financial knowledge scores and the corresponding financial practices
are statistically significant (e.g., knowing about credit issues is correlated
with having higher index scores for credit management practices). The au-
thors conclude that “this pattern may indicate that increases in knowledge
and experience can lead to improvements in financial practices, although the
causality could flow in the other direction – or even both ways”(Hilgert et al.,
2003, p. 321).
1.5.1 Planning and saving for retirement

Using HRS 2004 data, Lusardi and Mitchell (2007a) show that financial
literacy influences planning behavior, which, in turn, increases wealth hold-
ings. They check for reverse causality (i.e., the possibility that wealth affects
planning) and find that this is not the case.
As for retirement saving, Bernheim (1998) shows that the effect of finan-
cial literacy on a measure of accumulated retirement wealthis positive and
significant. This effect is robust to instrumenting the financial literacy score
with a macroeconomics test score.
13
Similarly, van Rooij et al. (2008) – using a module of the Dutch House-
hold Survey (DHS) fielded in 2005 – provide evidence of an independent
and positive effect of financial literacy on wealth accumulation over and
above the effect of other determinants such as income, age, education, risk
tolerance, patience, and basic cognitive ability. They suggest two channels
through which financial literacy may facilitate wealth accumulation: finan-
cial literacy increases stock market participation, and at the same time it
boosts retirement planning behavior by households. Since it is conceivable
that wealth management fosters the collection of a larger financial knowl-
edge and that the measurement of advanced financial knowledge could be
surrounded with substantial error they perform an IV regression including
economics education as an instrument for financial literacy, showing that
financial literacy is still affecting wealth.
1.5.2 Pension plan participation and retirement choices

Howlett et al. (2008) conducted an experiment on graduating seniors at a
public university in the US where participants were asked to imagine that
they were starting a new job and had to decide whether or not they wanted
to participate in their employer’s 401(k) plan. Their results suggest that
financial knowledge and orientation toward the future can interact to in-
fluence the likelihood of 401(k) plan participation. Future orientation is
defined as “the extent to which potential future consequences of an action
influence current decision outcomes.” Among consumers with (induced) fi-
nancial knowledge, future-oriented consumers expressed a greater likelihood
to participate in a retirement plan than less future-oriented consumers. How-
ever, in the absence of knowledge, consumers’ orientation toward the future
did not influence the likelihood of 401(k) plan participation.
Also Agnew et al. (2007) study pension plan participation in the US.
They find that in voluntary enrollment 401(k) plans, the effect of financial
literacy on saving is substantial, and is arguably more powerful than a size-
able increase in income. Under automatic enrollment, low levels of literacy
are strongly linked to employees’ decision to quit their employer’s savings
plan, suggesting that automatic enrollment fails to encourage savings among
workers with low literacy, even as it raises plan savings rates among the more
literate.
Finally, Clark et al. (2009) investigate how the retirement planning be-
haviour of three large US firms’ employees is related to their understanding
of retirement plans and their basic financial literacy. Findings indicate that
workers who believe that Social Security benefits can be accessed at earlier
(later) ages than the normal retirement age expect to retire earlier (later)
than workers who know the true age of eligibility.
14
1.5.3 Stock market participation
Christiansen et al. (2008) do not assess financial literacy in the usual way
but consider the change in stockholding associated with i) completing an
economics education and ii) an economist moving into the household. Hav-
ing a large panel dataset representative of the Danish population, they are
able to focus on the “longitudinal” change in educational status rather than
on the comparison of individuals with education in different subjects. They
also perform an IV estimation using the opening of a new university in a
given county as an instrument for choosing an economics education. They
show that economists are more likely to hold stocks than otherwise identical
investors.
van Rooij et al. (2008) mention stock market participation as a channel
through which financial literacy may affect higher wealth accumulation. van
Rooij et al. (2007) using a module of the DHS 2005 study the effect of
financial literacy on stock market participation, showing that individuals
who have low financial literacy are significantly less likely to invest in stocks.
The effect remains also after controlling for the endogeneity of financial
literacy (instrumented in a GMM regression with the exposure to economic
education in the early stages of life). They also perform some robustness
checks: i) concentrate on people who went to high school before 1990 during
a period when the stock market did not play any major role in the portfolios
of most Dutch families; ii) control for cognition (by using questions on how
difficult it was to do typical daily transactions right after the introduction
of the Euro in 2002; how difficult it was to understand the new health
insurance system introduced in 2006); iii) perform the empirical analysis
excluding three questions for which they implemented a different wording
(questions about bond pricing and and the riskiness of a company stock
versus a stock mutual fund).
Contrasting results are found by Cole and Shastry (2009), using a sam-
ple from the 1980-1990-2000 Public Use US Census Data to study the de-
terminants of financial market participation. They find that education (in-
strumented with exogenous variation in schooling mandates over time and
states) positively affects the probability of holding investment income (and
its amount), controlling for income. In investigating the determinants of this
result, they show that cognitive abilities increase participation, while finan-
cial literacy education (measured by variations in state-mandated financial
education in high schools, as in Bernheim et al. (2001)) does not.
1.5.4 Portfolio diversification

Using data from the University of Michigan’s monthly Survey of Consumers,
Kimball and Shumway (2007) investigate the relationship between financial
sophistication and three aspects of financial behaviour that can be thought of
15
as a lack of diversification: a “home bias” (e.g. lack of international diversi-
fication), holding employer stocks and overall portfolio under-diversification.
They find that the three puzzles appear to be correlated with each other,
and that sophistication is correlated with each of the puzzling behaviors,
with more sophisticated people participating in the financial market, hold-
ing foreign stocks, avoiding their employers’ stocks and diversifying their
portfolios.
Similarly, Guiso and Jappelli (2008) – using a survey of the customers
of one of the largest Italian commercial banks (Unicredit Customers’ Sur-
vey 2007) – find a strong positive relation between financial literacy and
portfolio diversification.Financial literacy is measured with questions based
on understanding not only interest rates and inflation, but also riskiness of
assets and the meaning of diversification.
1.5.5 Minimizing fees

Hastings and Tejeda-Ashton (2008) conduct a survey on socio-demographics,
saving behaviour and financial literacy (after the HRS 2004 tests) of Mexi-
can workers, coupled by a field experiment where respondents had to choose
between several investment funds for their retirement plans based on infor-
mation about fees and past returns. They find that respondents scoring high
on financial literacy were more price-sensitive when ranking the investment
funds. They also find that illiterate workers pay more attention to fees when
these are presented in absolute value (pesos) rather that in percentage, while
the financially literate do not change their behavior when fees are presented
in pesos or percentage. Finally, they show that all respondents – and es-
pecially financially illiterate ones – place lower weight on fees when returns
are included in the information presented.
Nöth and Puhan (2009) investigate the impact of financial literacy on
the ability to minimize mutual funds’ fees. In an online survey with more
than 3,000 readers of a large German weekly magazine for private investors
(“Borse Online”) they ask the subjects to choose between three index funds
that have the same benchmark but different fund inception dates and fee
structures. Even though the sample has a positive selection bias, more than
94% of the participants fail to minimize fees. Instead, more than 60% of all
participants choose the fund with the highest annualized past returns since
inception, although they are irrelevant for index mutual fund decisions. The
chasing of fund returns also crowds out participants’ fee sensitivity, with
overconfidence being a likely driver for non-fee-minimizing decisions. They
identify financial literacy as one of the variables explaining the ability to
make fee-minimizing choices.
Finally, Müller and Weber (2010) analyze the relationship between fi-
nancial literacy and mutual fund investment behavior. In particular, they
examine how financial literacy affects the tendency to rely on actively man-
16
aged funds rather than on low-cost passively managed alternatives. They
use data from an Internet survey conducted in cooperation with a large
German newspaper in May 2007. They find that that the relationship be-
tween financial expertise and the likelihood to rely on passive funds is rather
weak. Even very sophisticated investors overwhelmingly select active funds,
although they are very aware about less expensive ETF and index fund al-
ternatives. The sharp difference between knowing about passive fund alter-
natives and investing in them accordingly cannot be explained by a “smart
money” effect among smarter investors: more financially literate investors
are not able to select better performing actively managed funds, and differ-
ences in fund performance are not related to differences in financial literacy.
One explanation put forward by the authors is overconfidence; the authors
find a positive relationship between the belief to be better than average in
identifying investments that generate superior returns and the likelihood to
buy an active fund, and better-than-average thinking is positively correlated
with financial expertise. In addition, the study shows that more sophisti-
cated participants pay lower front-end loads, are less biased in their past
return estimates and in the risk assessment of their fund. However, finan-
cial literacy is not associated with lower annual management fees despite
the fact that more sophisticated subjects are able to state very accurate fee
estimates.
1.5.6 Other aspects of financial behaviour

Debt behavior
Descriptive evidence about financial literacy and debt behaviour in Aus-

tralia is reported in Australia and New Zealand Banking Group (2008).
Even though the use of pawn brokers, payday lenders and debt rescue com-
panies is very low, these sources were more likely to be used by members of
the bottom financial literacy quintile. Moreover, those with higher financial
literacy scores were more likely to identify the correct response to questions
about understanding credit rating and repayment responsibilities, than were
those with relatively lower levels of financial literacy.
Lusardi and Tufano (2008) investigate debt literacy, defined as the abil-
ity to make simple decisions regarding debt contracts, in particular basic
knowledge about interest and compounding, measured in the context of
everyday financial choices. First, lower levels of debt literacy were found
among groups including women, the elderly, certain minority groups, and
people with lower income and wealth. Second, individuals who transact in
ways that incur high fees (e.g., only pay minimums on their credit card
bills, incur late and over-the-limit fees)and those who use high cost alterna-
tive financial services are less debt literate, even after controlling for many
individual characteristics. Third, those who have the highest levels of debt
17
literacy are more likely to report facing no problems with debt, while those
with lower levels of literacy tend to judge their debt as excessive or are un-
sure about their debt position.
Mortgage delinquency
Gerardi et al. (2010) investigates the effect of numerical ability (mea-

sured as in Banks and Oldfield, 2007) and financial literacy (as in Lusardi
and Mitchell, 2006) on mortgage characteristics and repayment performance
in a survey of sub-prime mortgage borrowers who took out mortgages in 2006
or 2007. They find a significant and negative correlation between numerical
ability/ financial literacy and various measures of delinquency and default.
Annuities
Brown et al. (2008) examine individuals’ self-reported willingness to ex-

change part of their Social Security inflation-indexed annuity benefit for an
immediate lump-sum payment, using an experimental module in the 2004
Health and Retirement Study. Nearly three out of five respondents favor
the lump-sum payment if it were approximately actuarially fair, and more
financially literate individuals prefer the annuity.
1.5.7 The direction of causality

The evidence reviewed so far suggests a strong relation between financial
literacy and various domains of financial behaviour. However, financial lit-
eracy endogeneity may bias the results (Jappelli and Padula, 2010).
There may exist several sources of endogeneity. Some of the financial
practices considered (e.g., wealth management, financial market participa-
tion, etc.) may constitute occasions for learning through experience. Indeed,
2001 respondents in the Survey of Consumers report personal finance expe-
rience as their most important source of knowledge about financial issues
(Hilgert et al., 2003).
Moreover, as was reported in Section 1.4, some authors consider house-
hold financial resources as determinants of financial literacy. Delavande
et al. (2008) suggest that individuals may decide to invest in the acquisi-
tion of financial knowledge to benefit from higher risk-adjusted returns on
their financial assets. As long as better knowledge can yield higher returns,
the benefit from investing in financial knowledge depends on the amount of
assets invested. Another theoretical justification to the view that wealthier
individuals should have a greater incentive to acquire financial knowledge
comes from Peress (2004), who studies investors’ decisions to acquire in-
formation about assets payoffs, where information increases the expected
18
risk-adjusted returns of their portfolios. Again, the optimal amount of in-
formation depends on investors’ endowment of wealth.
Finally, it is possible that an unobserved factor, such as an underly-
ing interest in finance, simultaneously influences wealth accumulation and
willingness to acquire financial knowledge.
As was seen in the preceding paragraphs, many studies chose to in-
strument financial literacy both to address the endogeneity problems and
because financial literacy is likely to be measured with error, with the pos-
sible consequence of biasing the coefficient of financial knowledge towards
zero. The use of instruments treats both the endogeneity problem and the
measurement error problem.
However, finding instruments for financial literacy is very difficult. Here
I will review the most notable examples:
- Bernheim (1998) estimates a retirement wealth regression where finan-

cial knowledge is instrumented by macroeconomic knowledge. Macroe-
conomic knowledge is measured as the ability to answer to the ques-
tions: “What is the current national unemployment rate?”, “What is
the national minimum wage?”, “What is the annual rate of inflation?”,
“What is the size of the total federal debt?”, “What is the size of the
total federal debt per household?”. The validity of the instrument
rests upon the assumption that individuals with more resources have
a greater incentive to acquire information about financial matters, be-
cause they may need it to manage their wealth, while they may be less
interested in macroeconomic notions. The effect of financial knowledge
when instrumented is greater than with OLS.
- Bernheim et al. (2001) study the effect of high school financial cur-
riculum mandates on saving behavior of US households. They exploit
the variation in requirements across states and over time (between
1957 and 1985, 29 states adopted legislation mandating some form of
‘consumer’ education in secondary schools) to identify the effects of
interest. The evidence indicates that mandates have raised both ex-
posure to financial curricula and subsequent asset accumulation once
exposed students reached adulthood. Even though, in this study, vari-
ations in financial education mandates are used as regressors and not
as instruments (as financial literacy is not measured directly), this
is exactly the kind of exogenous variation that would prove an ideal
instrument.
- van Rooij et al. (2007) estimate the effect of financial literacy on stock
market participation and van Rooij et al. (2008) estimate the effect
of financial literacy on wealth accumulation. In both papers financial
literacy is instrumented with the answer to the question “how much of
your education is devoted to economics?” (meaning education before
19
entering the labour market). The instrument is valid as long as the
amount of economics education is not driven by an unobserved taste
for financial issues, which might determine both schooling choices and
subsequent investment decisions.
- Kimball and Shumway (2007) estimate the effect of financial literacy

on a tendency to display a lack of portfolio diversification. They instru-
ment financial sophistication with the “fraction of focal probabilities”
given by respondents, i.e. the fraction of four questions that are an-
swered with focal probabilities of 0, 50 or 100 percent. The intuition is
that non-mathematically-sophisticated respondent are more likely to
give focal probabilities when asked probabilistic questions. This idea is
taken from Lillard and Willis (2001), who devise the following 5 prob-
ability questions: “How about the chances that Congress will change
Social Security so that it becomes less generous than now?”,“And how
about the chances that the U.S. economy will experience double-digit
inflation sometime during the next 10 years or so?”,“(What is the
percent chance) that you will live to be 75 or more?”,“What do you
think are the chances that your income will keep up with inflation
for the next five years?”,“ What are the chances that you (and your
(husband/wife/partner)) will leave an inheritance totaling $10,000 or
more?”
1.6 Discussion and open issues

In spite of the remarkable amount of research devoted to the theme, there
are still several unresolved issues that could provide a starting point for new
research.
- In the strand of literature assessing the effect of financial literacy on

behavior, some aspects deserve more attention, such as debt behav-
ior, including mortgages and credit cards, and retirement decisions,
especially those related to the demand for annuities and to workers’
sensitivity to financial incentives to retirement.
- It is sometimes assumed that higher financial literacy can grant higher

risk-adjusted returns on financial investments (Delavande et al., 2008).
However, this is not been verified empirically. The returns to financial
literacy deserve further attention.
- The issue of the direction of causality between financial literacy and

financial behavior is far from being resolved. So far has not emerged a
“mainstream” instrument that could be included in financial literacy
surveys around the world. Moreover, it may not be possible to exploit
20
outside the US exogenous variations such as the one in high school
financial education curriculum mandates (Bernheim et al., 2001).
- Even if we took the large literature about the relation between financial
literacy and sound financial behaviour as evidence in favor of a causal
relation (from literacy to behavior), it would be still not entirely clear
to what extent financial literacy is necessary in order to achieve the
best allocation of resources and investment decisions in terms of risk
and return trade-offs. A challenging argument is that households could
decide to rely on the guidance of experts instead of taking the time and
efforts needed to acquire some financial expertise themselves. Chapters
3 and 4 of this dissertation will address this issue.
- The various definitions (and much of the research presented) implicitly

consider financial literacy as sufficient to improve financial well-being.
However, behavioral biases affecting investment behaviour (e.g., iner-
tia, overconfidence, lack of self control, etc.) are likely to reduce house-
holds’ ability to achieve financial well-being. An open issue is whether
higher financial literacy is related to the disappearance of these biases,
whether behavioral biases affect also the “financially literate”, or what
level of knowledge (possibly beyond the mere “literacy”) is necessary
to get rid of biases.
Appendix: Financial literacy tests

Dataset: Health and Retirement Study (US) – 2002, 2004, 2006, 2008 (05hr02d -
05hr04d - 05hr06d - 05hr08d). Section: Cognition
Paper: Lusardi and Mitchell (2007a); Lusardi (2007); Brown et al. (2008)
1. (D178) If the chance of getting a disease is 10 percent, how many people out of 1,000 would
be expected to get the disease? (number of people) | DK | RF
2. (D179) If 5 people all have the winning numbers in the lottery and the prize is two million
dollars, how much will each of them get? (amount) | DK | RF
For respondents who give the correct answer to either the first or the second question, the
following question is then asked:
3. (D180) Let’s say you have $200 in a savings account. The account earns 10 percent interest
per year. How much would you have in the account at the end of two years. (amount) |
DK | RF
Dataset: Health and Retirement Study 2004 – Module 8.

Paper: Lusardi and Mitchell (2006)
1. (V363) Do you think that the following statement is true or false?: Buying a single company
stock usually provides a safer return than a stock mutual fund. True | False| Don’t Know|
Refused
21
2. (V364) Suppose you had $100 in a savings account and the interest rate was 2% per year.
After 5 years, how much do you think you would have in the account if you left the money
to grow: more than $102, exactly $102, less than $102? More than $102 | Exactly $102 |
Less than $102 | Don’t Know| Refused
3. (V365) Imagine that the interest rate on your savings account was 1% per year and inflation
was 2% per year. After 1 year, would you be able to buy more than, exactly the same as,
or less than today with the money in this account? More than today | Exactly the same
as today | Less than today | Don’t Know| Refused
Dataset: Rand American Life Panel

Paper: Lusardi and Mitchell (2007b); Hung et al. (2009)
Basic Financial Literacy Questions
1. Numeracy
Suppose you had 100$ in a savings account and the interest rate was 2% per year. After
5 years, how much do you think you would have in the account if you left the money to
grow? (i) More than $102; (ii) Exactly $102; (iii) Less than $102; (iv) Do not know (DK);
(v) Refuse.
2. Compound Interest
Suppose you had $100 in a savings account and the interest rate is 20% per year and you
never withdraw money or interest payments. After 5 years, how much would you have on
this account in total? (i) More than $200; (ii) Exactly $200; (iii) Less than $200; (iv) DK;
(v) Refuse.
3. Inflation
Imagine that the interest rate on your savings account was 1% per year and inflation was
2% per year. After 1 year, how much would you be able to buy with the money in this
account? (i) More than today; (ii) Exactly the same; (iii) Less than today; (iv) DK; (v)
Refuse.
4. Time Value of Money
Assume a friend inherits $10,000 today and his sibling inherits $10,000 3 years from now.
Who is richer because of the inheritance? (i) My friend; (ii) His sibling; (iii) They are
equally rich; (iv) DK; (v) Refuse.
5. Money Illusion
Suppose that in the year 2010, your income has doubled and prices of all goods have
doubled too. In 2010, how much will you be able to buy with your income? (i) More than
today; (ii) The same; (iii) Less than today; (iv) DK; (v) Refuse.
Sophisticated Financial Literacy Questions
1. Function of Stock Market

Which of the following statements describes the main function of the stock market? (i) The
stock market helps to predict stock earnings; (ii) The stock market results in an increase in
the price of stocks; (iii) The stock market brings people who want to buy stocks together
with those who want to sell stocks; (iv) None of the above; (v) DK; (vi) Refuse.
2. Knowledge of Mutual Funds
Which of the following statements is correct? (i) Once one invests in a mutual fund, one
cannot withdraw the money in the first year; (ii) Mutual funds can invest in several assets,
for example invest in both stocks and bonds; (iii) Mutual funds pay a guaranteed rate
of return which depends on their past performance; (iv) None of the above; (v) DK; (vi)
Refuse.
3. Relation between Interest Rates and Bond Prices If the interest rate falls, what should
happen to bond prices? (i) Rise; (ii) Fall; (iii) Stay the same; (iv) None of the above; (v)
DK; (vi) Refuse.
4. Safer: Company Stock or Mutual Fund
True or false? Buying a company stock usually provides a safer return than a stock mutual
fund. (i) True; (ii) False; (iii) DK; (iv) Refuse.
5. Riskier: Stocks or Bonds
True or false? Stocks are normally riskier than bonds. (i) True; (ii) False; (iii) KD; (iv)
Refuse.
22
6. Long Period Returns
Considering a long time period (for example 10 or 20 years), which asset normally gives
the highest return? (i) Savings accounts; (ii) Bonds; or (iii) Stocks; (iv) DK; (vi) Refuse.
7. Highest Fluctuations
Normally, which asset displays the highest fluctuations over time? (i) Savings accounts,
(ii) Bonds, (iii) Stocks; (iv) DK; (v) Refuse.
8. Risk Diversification
When an investor spreads his money among different assets, does the risk of losing money:
(i) Increase, (ii) Decrease (iii) Stay the same; (iv) DK; (v) Refuse.
Dataset: National Longitudinal Survey of Youth 1997 (US)

Paper: Lusardi et al. (2010)
1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After
grow: more than $102, exactly $102, or less than $102? Do not know; refuse to answer
2. Imagine that the interest rate on your savings account was 1% per year and inflation was
2% per year. After 1 year, would you be able to buy more than, exactly the same as, or
less than today with the money in this account? Do not know; refuse to answer
3. Do you think that the following statement is true or false? “Buying a single company stock
usually provides a safer return than a stock mutual fund.” Do not know; refuse to answer
Dataset: own survey

Paper: Gerardi et al. (2010)
1. Imagine that the interest rate on your savings account was 1% per year and inflation was
account? More than today, exactly the same as today, or less than today?
2. Suppose that in the year 2020, your income has doubled and prices of all goods have dou-
bled too. In 2020, how much will you be able to buy with your income? More than today,
exactly the same as today, or less than today?
Dataset: University of Michigan’s monthly Survey of Consumers (April 2005)

Paper: Kimball and Shumway (2007)
1. A mutual fund combines the money of many investors to buy a variety of stocks or bonds.
(true = 1, false = 2, DK or NA = 2)
2. Checking accounts earn a higher rate of return than other types of investments purchased
from a bank. (true = 1, false = 2, DK or NA = 1)
3. I can usually tell when it is a good time to buy or sell stock. (5 point scale, DK or neither
agree nor disagree = 1)
4. There is an ideal time of the year to invest. (5 point scale, DK or neither agree nor disagree
= 1)
5. Only brokers make money in the stock market. (5 point scale, DK or neither agree nor
disagree = 1)
6. If a stocks value is down, it will eventually come back up. (5 point scale, DK or neither
7. Investments with high risk are best for younger individuals. (5 point scale, DK or neither
8. Investing in only one type of stock, like tech stocks, makes sense. (5 point scale, DK or
neither agree nor disagree = 1)
9. You should always put your money into the safest investment you can find. (5 point scale,
DK or neither agree nor disagree = 1)
10. Choosing to invest in both small and large companies at the same time is wise. (5 point
scale, DK or neither agree nor disagree = 5)
23
11. Investments offered by a bank are the best investments you can buy. (5 point scale, DK
or neither agree nor disagree = 1)
12. The earlier in life that you invest, the better o? you will be financially. (5 point scale, DK
or neither agree nor disagree = 5)
13. If you are smart, it is easy to make money in the stock market. (5 point scale, DK or
neither agree nor disagree = 1)
14. To do well in the stock market, you have to buy and sell your stocks often. (5 point scale,
DK or neither agree nor disagree = 1)
Dataset: University of Michigan’s monthly Survey of Consumers (Nov/Dec 2001)

Paper: Hilgert et al. (2003)
True/False questions
Credit
1. Creditors are required to tell you the APR that you will pay when you get a loan.
2. If you expect to carry a balance on your credit card, the APR is the most important thing
to look at when comparing credit card offers.
3. Your credit report includes employment data, your payment history, any inquiries made
by creditors, and any public record information.
4. The finance charge on your credit card statement is what you pay to use credit.
5. Using extra money in a bank savings account to pay off high interest rate credit card debt
is a good idea.
6. Your credit rating is not affected by how much you charge on your credit cards.
7. If your credit card is stolen and someone uses it before you report it missing, you are only
responsible for $50, no matter how much they charge on it.
8. If you have any negative information on your credit report, a credit repair agency can help
you remove that information.
9. If you are behind on debt payments and go to a credit counseling service, they can get the
federal government to apply your income tax refund to pay off your debts.
Saving
10. You should have an emergency fund that covers two to six months of your expenses.
11. If you have a savings account at a bank, you may have to pay taxes on the interest you
earn.
12. If you buy certificates of deposit, savings bonds, or Treasury bills, you can earn higher
returns than on a savings account, with little or no added risk.
13. With compound interest, you earn interest on your interest, as well as on your principal.
14. Whole life insurance has a savings feature while term life insurance does not.
Investment
15. The earlier you start saving for retirement, the more money you will have because the
effects of compounding interest increase over time.
16. A stock mutual fund combines the money of many investors to buy a variety of stocks.
17. Employers are responsible for providing the majority of funds that you will need for re-
tirement.
18. Over the long term, stocks have the highest rate of return on money invested.
19. Mutual funds pay a guaranteed rate of return.
20. All investment products bought at your bank are covered by FDIC insurance.
Mortgages
21. When you use your home as collateral for a loan, there is no chance of losing your home.
24
22. You could save thousands of dollars in interest costs by choosing a 15-year rather than a
30-year mortgage.
23. If the interest rate on an adjustable-rate mortgage loan goes up, your monthly mortgage
payments will also go up.
24. Repeatedly refinancing your home mortgage over a short period of time results in added
fees and points that further increase your debt.
Other
25. Making payments late on your bills can make it more difficult to take out a loan.
26. Your bank will usually call to warn you if you write a check that would overdraw your
account.
27. The cash value of a life insurance policy is the amount available if you surrender your life
insurance policy while you’re still alive.
28. After signing a contract to buy a new car, you have three days to change your mind.
Dataset: own survey (US)

Paper: Lusardi and Tufano (2008)
1. Suppose you owe $1,000 on your credit card and the interest rate you are charged is 20%
per year compounded annually. If you didn’t pay anything off, at this interest rate, how
many years would it take for the amount you owe to double? (i) 2 years;(ii) less than 5
years; (iii) 5 to 10 years; (iv) more than 10 years; (v) Do not know; (vi) Refuse to answer.
2. You owe $3,000 on your credit card. You pay a minimum payment of $30 each month.
At an Annual Percentage Rate of 12% (or 1% per month), how many years would it take
to eliminate your credit card debt if you made no additional new charges? (i) Less than
5 year; (ii) Between 5 and 10 years; (iii) Between 10 and 15 years; (iv) Never, you will
continue to be in debt; (v) Do not know; (vi) Prefer not to answer.
3. You purchase an appliance which costs $1,000. To pay for this appliance, you are given the
following two options: a) Pay 12 monthly installments of $100 each; b)Borrow at a 20%
annual interest rate and pay back $1,200 a year from now. Which is the more advantageous
offer? (i) Option (a); (ii) Option (b); (iii) They are the same;(iv) Do not know; (v) Prefer
not to answer.
Dataset: DNB Household Survey (Netherlands) – two special modules

Paper: van Rooij et al. (2007)
Basic Literacy questions
1. Numeracy
Suppose you had e100 in a savings account and the interest rate was 2% per year. After
grow? (i) More than e102; (ii) Exactly e102; (iii) Less than e102; (iv) Do not know; (v)
Refusal.
2. Interest compounding
Suppose you had e100 in a savings account and the interest rate is 20% per year and you
never withdraw money or interest payments. After 5 years, how much would you have on
this account in total? (i) More than e200; (ii) Exactly e200; (iii) Less than e200; (iv) Do
not know; (v) Refusal.
3. Inflation
account? (i) More than today; (ii) Exactly the same; (iii) Less than today; (iv) Do not
know; (v) Refusal.
4. Time value of money
Assume a friend inherits e10,000 today and his sibling inherits e10,000 3 years from now.
Who is richer because of the inheritance? (i) My friend; (ii) His sibling; (iii) They are
equally rich; (iv) Do not know; (v) Refusal.
25
5. Money illusion
Suppose that in the year 2010, your income has doubled and prices of all goods have
doubled too. In 2010, how much will you be able to buy with your income? (i) More than
today; (ii) The same; (iii) Less than today; (iv) Do not know; (v) Refusal.
Advanced Literacy questions
1. Which of the following statements describes the main function of the stock market? (i) The
stock market helps to predict stock earnings; (ii) The stock market results in an increase
in the price of stocks; (iii)The stock market brings people who want to buy stocks together
with those who want to sell stocks; (iv) None of the above; (v) Do not know; (vi) Refusal.
2. Which of the following statements is correct? If somebody buys the stock of firm B in the
stock market: (i) He owns a part of firm B; (ii) He has lent money to firm B; (iii) He is
liable for firm B’s debts; (iv) None of the above; (v) Do not know; (vi) Refusal.
3. Which of the following statements is correct? (i) Once one invests in a mutual fund, one
cannot withdraw the money in the first year; (ii) Mutual funds can invest in several assets,
for example invest in both stocks and bonds; (iii) Mutual funds pay a guaranteed rate of
return which depends on their past performance; (iv) None of the above; (v) Do not know;
(vi) Refusal.
4. Which of the following statements is correct? If somebody buys a bond of firm B: (i) He
owns a part of firm B; (ii) He has lent money to firm B; (iii) He is liable for firm B’s debts;
(iv) None of the above; (v) Do not know; (vi) Refusal.
5. Considering a long time period (for example 10 or 20 years), which asset normally gives
the highest return? (i) Savings accounts; (ii) Bonds; (iii) Stocks; (iv) Do not know; (vi)
Refusal.
6. Normally, which asset displays the highest fluctuations over time? (i) Savings accounts;
(ii) Bonds; (iii) Stocks; (iv) Do not know; (v) Refusal.
7. When an investor spreads his money among different assets, does the risk of losing money:
(i) Increase; (ii) Decrease; (iii) Stay the same; (iv) Do not know; (v) Refusal.
8. If you buy a 10-year bond, it means you cannot sell it after 5 years without incurring a
major penalty. True or false? (i) True; (ii) False); (iii) Do not know; (iv) Refusal.
9. Stocks are normally riskier than bonds. True or false? (i) True; (ii) False; (iii) Do not
know; (iv) Refusal.
10. Buying a company stock usually provides a safer return than a stock mutual fund. True
or false? (i) True; (ii) False; (iii) Do not know; (iv) Refusal.
11. If the interest rate falls, what should happen to bond prices? (i) Rise; (ii) Fall; (iii) Stay
the same; (iv) None of the above; (v) Do not know; (vi) Refusal.
Dataset: FSA (UK) SECTION N - MONEY QUIZ

Paper: Atkinson et al. (2006)
1. (QNquiz) SHOWCARD N1. Looking at this example of a bank statement, please can
you tell me how much money was in the account at the end of February? Numeric range
(PERMITTED RANGE 1 TO 9,999) | Don’t know | Refused
2. (QNquiz1) SHOWCARD N2. And still looking at this statement, if a direct debit of £179
comes in on 28th February and there is an agreed overdraft limit of £100 on the account,
would there be enough money in the account including the overdraft limit, to cover the
direct debit? Yes | No | Don’t know | Refused
3. (QNquiz2) If the inflation rate is 5% and the interest rate you get on your savings is 3%,
will your savings have at least as much buying power in a year’s time? Yes | No | Don’t
know | Refused
4. (QNquiz3) SHOWCARD N3. This chart shows how a £10,000 investment would have
performed in different types of investment funds over the last seven years. Assuming that
fees and charges are the same for all funds, which fund gave the best return after seven
years? Fund 1 | Fund 2 | Fund 3 | Don’t know | Refused
26
5. (QNquiz4) SHOWCARD N4. And which would have been the best fund to have chosen if
you had to withdraw your money after four years? Fund 1 | Fund 2 | Fund 3 | Don’t know
| Refused
6. (QNquiz5) SHOWCARD N5. Suppose you saw the same television on sale at a discount
in two different shops. The original purchase price of the television was £250. One shop
is offering a discount of £30 off the original price, the other is offering a discount of 10%
off the original price. Which is the better deal - £30 off or 10% off? £30 off | 10% off |
Don’t know | Refused
7. (QNquiz6) SHOWCARD N6 Can you tell me for which of these types of mortgage you
would be guaranteed to pay off the full amount borrowed if you kept up the repayments?
CODE ALL MENTIONED. Repayment mortgage | Low Cost Endowment mortgage |
Interest-only mortgage with an associated investment in a stocks and shares ISA or PEP
| Interest-only mortgage with no associated investment | Don’t know | Refused
8. (QNquix7) SHOWCARD N7. Which of these savings and investments do you think would
have their cash value directly affected by stock-market performance? IF NECESSARY
ADD: we are asking about typical examples of the product. CODE ALL MENTIONED.
Cash ISA | Insurance/Investment bond (e.g. managed bond, with-profits bond) | Savings
account with a bank or building society | Equity ISA | Endowment policy (with-profits or
unit-linked) | Unit trust | Personal pension plan (with-profits or unit-linked) | Don’t know
| Refused | None of these
Dataset: SHIW 2006 (Italy).

Paper: Monticone (2010)
1. (QUIZ1) Suppose you receive this statement of account from your bank; can you tell me
what sum of money is available at the end of May? amount in euros | don’t know
2. (QUIZ2) Imagine leaving 1,000 euros in a current account that pays 1% interest and has no
charges. Imagine also that inflation is running at 2%. Do you think that if you withdraw
the money in a year’s time you will be able to buy the same amount of goods as if you
spent the 1,000 euros today? yes | no, I will be able to buy less | no, I will be able to buy
more | don’t know
3. (QUIZ 3) This figure shows the value of two different investment funds over the last four
years. Which fund do you think produced the largest return in that period? fund 1 | fund
2 | the funds earned the same | don’t know
4. (QUIZ 4) Imagine leaving 1,000 euros in a current account that pays 2% annual interest
and has no charges. What sum do you think will be available at the end of 2 years? less
than 1,020 euros | exactly 1,020 euros | more than 1,020 euros | don’t know
5. (QUIZ 6) Imagine you have only equity funds and stock market prices fall. Are you...?
better off | less well off | as well off as before | don’t know
6. (QUIZ 7) Which of the following types of mortgage do you think will allow you from the
very start to fix the maximum amount and number of installments to be paid before the
debt is extinguished? floating-rate mortgage | fixed-rate mortgage | floating-rate mortgage
with fixed installments | don’t know
Dataset: 2007 Unicredit Consumer’s Survey (Italy)

Paper: Guiso and Jappelli (2008)
Financial literacy:
1. Suppose that in the next 6 months interest rate will increase. Do you think it is a good
idea to buy today fixed interest rate bonds?
2. Suppose that a saving account earns an interest rate of 2 percent per year (net of costs).
If the annual inflation rate is 2 percent, after two years (with no withdrawals), you think
you could buy more than you could buy today/less/the same/don’t know
27
3. Do you think that financial diversification is: Hold stocks and bonds/ Don’t hold too long
the same asset / to invest in as many assets as possible/ To invest in assets to limit risk
exposure/ to avoid high-risk assets
4. Evaluate how diversified are specific portfolios: 70 percent invested in T-bills and 30
percent in European Equity fund/70 percent invested in T-bills and 15 percent in European
Equity fund and 15 percent in 2-3 stocks/70 percent invested in T-bills and 30 percent in
2-3 stocks/ 70 percent invested in T-bills and 30 percent in stock I know well
5. Ability to rank asset categories correctly according to riskiness:
- bonds are at least as risky as transaction accounts

- stocks are at least as risky as bonds
- equity mutual funds are at least as risky as bond mutual funds
- housing is riskier than transaction accounts
Perceived financial sophistication: How well you think you know the characteristics of this fi-
nancial asset? Treasury bills; Repurchase agreements; corporate bonds; mutual funds; unit linked
life insurance; ETF; managed investment accounts; derivatives; stocks.
Dataset: SAVE 2007-2009 (Germany)

Paper: Bucher-Koenen and Lusardi (2010)
1. Interest Calculation
Suppose you had $100 in a savings account and the interest rate was 2% per year. After
grow? More than $102 | exactly $102 | less than $102
2. Inflation
2% per year, would you be able to buy more than, exactly the same as, or less than today
with the money in this account?
3. Diversification
Do you think that the following statement is true or false? “Buying a single company stock
usually provides a safer return than a stock mutual fund” Right | wrong | don’t know
Dataset: own survey (Germany)

Paper: Nöth and Puhan (2009)
1. Question 1: (Idea of compounded interest, not displayed)

Today, you deposit e 100 for five years on a savings account with an annual interest rate
of 2%. Please indicate the amount (in e that you receive at the end of five years, if the
entire investment amount remains in the account during these five years.
Choice Options: euro 110; euro 110.41; euro 112.40; do not know.
2. Question 2: (Money market fund knowledge, not displayed)

Today, euro 1,000 is invested in a money market fund. Is it possible that you will receive
less than e 1,000 if you withdraw your money back after two years?
Choice Options: yes; no; do not know.
3. Question 3: (Mutual fund knowledge, not displayed)

Which of the following statements is correct? Please note that only one statement is
correct. Choice Options: Mutual funds are riskier than investments in single stocks; mutual
funds can change their investment policy over time and thus become riskier; mutual funds
are tax-efficient because you do not have to pay capital gain taxes; none of the above; do
not know.
4. Question 4: (Bond knowledge, not displayed)

Which of the following statements is correct? Please note that only one statement is
correct. If someone buys a corporate bond of Company B:
Choice Options: She owns a part of the company; She lends money to the company; She
is liable for the debt of the company B; None of the above; Do not know.
28
5. Question 5: (Idea of diversification, not displayed)
Buying a company stock usually provides a safer return than a stock mutual fund.
Choice Options: true; false; do not know.
6. Question 6: (Mutual fund investment fee calculation, not displayed)

Suppose you have invested e 10,000 in a mutual fund with an additional payment of a
front-end load of 5% on January 2nd, 2007. At the end of each year, you have to pay a
management fee of 1.9% and an administration fee of 0.1%. In addition, the fund realized
a 10% return in your first investment year. Please, indicate the amount of fees that you
have to pay to the mutual fund provider until December 31st, 2007!
Choice Options: euro 200; euro 220; euro 500; euro 700 ; euro 720; do not know.
Dataset: own survey (Germany)

Paper: Müller and Weber (2010)
1. Short-selling a stock means that the stock is sold without actually owning it.
2. Assuming efficient stock markets, it is not possible to beat the market.
3. Dividends are additional payments to the management of a company.
4. The abbreviation IPO refers to a financial regulatory authority which supervises the place-
ment of securities at a stock exchange.
5. The Japanese stock index is called Hang-Seng Index.
6. The compounded-interest-effect occurs if the lending rate is larger than the borrowing rate.
7. If one raises a mortgage or a loan, one should rather take the nominal interest rate than
the effective rate of interest into account because the former indicates the actual credit
costs.
8. Creditworthiness describes the ability to pay interests on a raised loan and to redeem the
loan.
Possible answers: True | False | Don’t Know:
Dataset: SHARE, Waves 1 and 2.

Countries Wave 1: Austria, Belgium, Denmark, France, Greece, Germany, Italy, Israel, Nether-
lands, Spain, Sweden, Switzerland; Countries Wave 2: Austria, Belgium, Czech Republic, Den-
mark, France, Greece, Germany, Italy, Netherlands, Poland, Spain, Sweden, Switzerland
Paper: Christelis et al. (2005, 2010) and mentioned also in Jappelli (2010)
(1) CF012 NUMERACY-CHANCE DISEASE 10 PERC. OF 1000

If the chance of getting a disease is 10 per cent, how many people out of 1000 (one thousand)
would be expected to get the disease? 100 | 10 | 90 | 900 | Other answer
(2) CF013 NUMERACY-HALF PRICE

In a sale, a shop is selling all items at half price. Before the sale, a sofa costs 300 [local
currency]. How much will it cost in the sale? 150 [local currency] | 600 [local currency] |
Other answer
(3) CF014 NUMERACY-6000 IS TWO-THIRDS WHAT IS TOTAL PRICE A second hand

car dealer is selling a car for 6,000 [local currency]. This is two-thirds of what it costs
new. How much did the car cost new? 9,000 [local currency] | 4,000 [local currency] | 8,000
[local currency] | 12,000 [local currency] | 18,000 [local currency] | Other answer
(4) CF015 AMOUNT IN THE SAVINGS ACCOUNT Let’s say you have 2000 [local currency]
in a savings account. The account earns ten per cent interest each year. How much
would you have in the account at the end of two years? 2420 [local currency] | 2020 [local
currency] | 2040 [local currency] | 2100 [local currency] | 2200 [local currency] | 2400 [local
currency] | Other answer
If a person answers (1) correctly she is then asked (3) and if she answers correctly again she
is asked (4). Answering (1) correctly results in a score of 3, answering (3) correctly but not (4)
results in a score of 4 while answering (4) correctly results in a score of 5. On the other hand if
she answers (1) incorrectly she is directed to (2). If she answers (2) correctly she gets a score of
2 while if she answers (2) incorrectly she gets a score of 1.
29
Chapter 2
The determinants of financial

literacy in Italy and the role
of household wealth
2.1 Introduction
Italy shares several features with the United States and many European
countries in terms of pension policy and increasing complexity of the finan-
cial environment. The public pension system reform, begun in the ’90s and
aimed at improving its long-term sustainability, brought about a need for
Italian workers to learn how to actively manage their retirement savings.
Before the reform, high public pension benefits ensured financial security in
retirement, while the system that will emerge after the transition will be
characterized by less generous public benefits. Therefore, the achievement
of adequate pensions will have to rely on privately managed pension plans,
which in turn require greater financial sophistication in savings and invest-
ment management. Workers will become increasingly responsible for their
own financial security after retirement. Due to the encouragement toward
pension plans stemming from the pension system reform, workers will have
to decide both how much to save for retirement and how to allocate their
pension wealth. At the same time, the complexity of financial instruments
has increased and individuals have to deal with new and more sophisticated
financial products.
In recent years, a growing body of literature has shown that knowledge
of basic financial principles among the population should not be taken for
granted, both in the US and in Europe (van Rooij et al., 2007; Lusardi and
Mitchell, 2006). Moreover, it appears that financial literacy is related to
a wide range of financial behaviors, including wealth accumulation, stock
0
This chapter partly draws on Monticone (2010).
30
market participation, portfolio diversification, participation and asset allo-
cation in 401(k) plans, indebtedness, and responsible financial behavior in
general (Lusardi and Mitchell, 2007a; van Rooij et al., 2007; Lusardi and
Tufano, 2008; Guiso and Jappelli, 2008; Howlett et al., 2008).
Since accumulating resources for one’s own retirement is one of the most
important reasons to save (Browning and Lusardi, 1996), wealth accumu-
lation can be interpreted as an indicator of the ability to save adequately
for old age. Lusardi and Mitchell (2007a) show that financial literacy in-
fluences planning behavior, which, in turn, increases wealth holdings. Sim-
ilarly, Bernheim and Garrett (2003) find that workers tend to accumulate
significantly more assets when their employer offers financial education. The
finding that financial literacy matters in wealth accumulation is consistent
across different countries. The net worth of Dutch households is positively
and significantly affected by the degree of financial literacy, even after con-
trolling for other factors potentially affecting saving behavior, such as risk
aversion, patience, and precaution (van Rooij et al., 2008).
Alongside the previously mentioned studies showing that financial knowl-
edge positively affects saving behavior, there is also evidence that financial
behavior itself influences financial knowledge. Clearly financial experience
can be a source of learning. Personal financial experience is mentioned as
the single most important source of knowledge by respondents in the Sur-
vey of Consumers conducted by the University of Michigan in 2001 (Hilgert
et al., 2003). In particular, respondents with more sound financial behavior
(in terms of cash flow management, credit management, savings, and invest-
ments) were more likely to report experience as their most important source
of learning about personal finance. As for credit literacy, Lyons et al. (2007)
find that various measures of previous financial experience have a positive
effect on the degree of knowledge about credit reports and credit scores. For
instance, having a mortgage or past experience with credit reports influences
consumers’ knowledge and understanding of credit-reporting issues.
Finally, some authors have also suggested that the level of financial
wealth can be one of the reasons for becoming more knowledgeable (Bern-
heim, 1998; Delavande et al., 2008; Peress, 2004). The rationale is that
wealth management can foster the acquisition of greater financial knowl-
edge, which can be acquired by attending seminars, through self-study, by
means of books, magazines, websites, and the like.
In the context of widespread financial illiteracy and increasing need for
better financial understanding, it is of interest not only to assess the current
level of financial literacy among the Italian population but also to investigate
its determinants, as it might help to formulate policy interventions.
Using the Bank of Italy’s Survey on Household Income and Wealth
(SHIW), this paper studies the link between wealth accumulation and finan-
cial knowledge. As was documented previously, financial knowledge predicts
higher levels of wealth holdings. However, some authors have also suggested
31
that the level of financial wealth can be one of the reasons for becoming
more knowledgeable. This suggests that causality might go in both direc-
tions. By analyzing the determinants of financial literacy in a representative
sample of Italian households, this paper aims to assess whether financial ac-
cumulation has an exogenous impact on literacy. My findings indicate that
indeed wealth is one of the factors explaining the observed degree of financial
literacy.
The paper is organized as follows. Section 2.2 briefly discusses the previ-
ous literature on the topic. Section 2.3 presents data and descriptive statis-
tics. Section 2.4 describes the empirical strategy to analyze the effect of
wealth on the degree of financial literacy and discusses the issue of endo-
geneity. Section 2.5 presents the results and some robustness checks, while
Section 2.6 concludes.
2.2 Background on financial literacy determinants

A recent strand of research provides several insights into the determinants
of financial knowledge. Most of this literature focuses on U.S. consumers
but it also presents evidence for a few other countries, such as Italy, the
Netherlands, and Australia. A more thorough review of financial literacy
determinants is in chapter 1. I will summarize here the main findings and
those that are more relevant to the following empirical analysis.
Demographic characteristics, such as being male and white, are com-
monly associated with greater financial knowledge in several countries (see
Bernheim, 1998; Lusardi and Mitchell, 2006 and Lyons et al., 2007 for the
US; Guiso and Jappelli, 2008 for Italy, van Rooij et al., 2007 about the
Netherlands, and Australia and New Zealand Banking Group, 2008 about
Australia. There is some evidence of an inverse U-shaped age profile of
financial knowledge, meaning that middle-aged adults report higher scores
than both their younger and older counterparts (Australia and New Zealand
Banking Group, 2008). The initial rise with age might be related to an in-
crease in experience, while the subsequent decline could be the result of
deteriorating cognitive functions (Agarwal et al., 2009).
A higher level of education is usually associated with a higher degree
of financial knowledge (Australia and New Zealand Banking Group, 2008;
Bernheim, 1998; Guiso and Jappelli, 2008; Lusardi and Mitchell, 2007a;
Meier and Sprenger, 2008). Other factors related to financial literacy are
time preferences (Meier and Sprenger, 2008), family background (Lusardi
et al., 2010), and household wealth resources.
The literature exploring the role of household resources as a determinant
of financial knowledge is mainly based on empirical contributions. Meier and
Sprenger (2008) show that knowledge is positively associated with income
level. In Italy, Guiso and Jappelli (2006, 2008) find that high income and
32
financial wealth are associated with greater financial knowledge scores and a
greater amount of time spent every week to obtain information on investing
one’s savings. Bernheim (1998) finds that respondents’ financial scores rise
with their earnings, while their macroeconomic scores do not. According
to the author, individuals with more resources have a greater incentive to
acquire information about financial matters, because they may need it to
manage their wealth, while they may be less interested in macroeconomic
notions. The idea that resources matter is suggested also by Donkers and
van Soest (1999), who show that in the Netherlands individuals with higher
incomes are more interested in finance.
Other papers attempt to build a theoretical framework of the link be-
tween wealth and financial knowledge (Jappelli and Padula, 2010). Dela-
vande et al. (2008) view the acquisition of financial knowledge as a sort
of human capital investment. According to the standard theory of human
capital (Ben-Porath, 1967), by devoting part of their time to education, in-
dividuals forgo current earnings but increase their stock of human capital.
Since future earnings are assumed to depend on the accumulated stock of
human capital, the individual decides how much education to obtain on the
basis of the trade-off between forgone earnings today and increased earnings
in the future. Delavande et al. (2008) assume that financial knowledge al-
lows investors to obtain higher expected rates of return on their assets, for
any given level of risk, up to a theoretical maximum on the mean-variance
frontier. In analogy with the theory of human capital, investors decide to
invest in the acquisition of financial knowledge, thereby incurring costs in
terms of money, time, and effort, to benefit from higher risk-adjusted returns
on their financial assets. In this framework, the benefit from investing in
financial knowledge also depends on the amount of assets invested, because
the higher the stock of financial knowledge possessed, the higher the rates
of return obtained by the assets. Hence, according to this model, wealthier
individuals should have a greater incentive to acquire financial knowledge.
Furthermore, a theoretical formalization of the two-way relation between
financial knowledge and wealth accumulation comes from the literature on
information acquisition in financial markets and its effect on asset prices.
The model by Peress (2004) studies investors’ decisions to acquire infor-
mation about assets payoffs, where information increases the expected risk-
adjusted returns of their portfolios. Again, investors face a trade-off between
the cost of information acquisition and its benefit, expressed as a function
of the initial endowment of wealth. The mechanism whereby wealth in-
creases the benefit of acquiring information can be summarized as follows.
Since (absolute) risk tolerance is assumed to be an increasing function of
wealth, investors endowed with more wealth will be more risk tolerant and
will invest a higher fraction of their wealth in risky assets. This makes
information about stocks payoff more valuable to them, leading to greater
investment in information acquisition. Moreover, the optimality condition
33
equaling marginal cost of information acquisition with marginal benefit de-
fines a wealth threshold below which information acquisition is not worth
the cost, leaving poorer individuals with no incentive to acquire information.
To sum up, from studies examining the impact of financial wealth on
financial literacy from a theoretical perspective emerges the hypothesis that
wealthier individuals should be more likely to acquire financial knowledge.
This idea is corroborated by papers investigating this relation from an em-
pirical perspective, showing that household income and wealth are positively
associated with financial literacy. None of these contributions, however, ad-
dresses the issue of wealth endogeneity. This can be a serious concern, given
the importance of financial knowledge for wealth accumulation itself. The
hypothesis that the extent of financial assets can have an exogenous effect
on financial knowledge will be tested in the empirical analysis that follows.
2.3 Data and descriptive evidence

Every two years, through the Survey on Household Income and Wealth
(SHIW), the Bank of Italy collects detailed data on demographics, house-
hold consumption, income, and wealth in a representative sample of the
Italian population. In 2006 the survey covered 7,768 households and 19,551
individuals. In that wave, in addition to the standard questionnaire, about
half of the sample (3,992 households in which the head was born on an
even year) was given an extra module on financial literacy to be answered
by the individual identified as the head of the household.1 Questions dealt
with reading a bank account statement, understanding inflation and interest
compounding, and grasping the working of the stock market and mortgages.
The precise wording of the questions was as follows:
- Quiz 1: Suppose you receive this statement of account from your bank; can
you tell me what sum of money is available at the end of May? (See Figure
2.1 in the Appendix) i. Amount in euro / ii. Don’t know
- Quiz 2: Imagine leaving 1,000 euro in a current account that pays 1% interest
and has no charges. Imagine also that inflation is running at 2%. Do you
think that if you withdraw the money in a year’s time you will be able to
buy the same amount of goods as if you spent the 1,000 euro today? i. Yes
/ ii. No, I will be able to buy less / iii. No, I will be able to buy more / iv.
Don’t know
- Quiz 3: This figure shows the value of two different investment funds over
the last four years. Which fund do you think produced the largest return in
that period? (See Figure 2.2 in the Appendix) i. Fund 1 / ii. Fund 2 / iii.
The funds earned the same / iv. Don’t know
1
The household head is identified as the the person responsible for the household bud-
get.
34
- Quiz 4: Imagine leaving 1,000 euro in a current account that pays 2% annual
interest and has no charges. What sum do you think will be available at the
end of 2 years? i. Less than 1,020 euro / ii. Exactly 1,020 euro / iii. More
than 1,020 euro / iv. Don’t know
- Quiz 5: Imagine you have only equity funds and stock market prices fall. Are
you...? i. Better off / ii. Worse off / iii. As well off as before / iv. Don’t
know
- Quiz 6: Which of the following types of mortgage do you think will allow you
from the very start to fix the maximum amount and number of installments
to be paid before the debt is extinguished? i. Floating-rate mortgage / ii.
Fixed-rate mortgage / iii. Floating-rate mortgage with fixed installments /
iv. Don’t know
Some of the questions are very similar to the ones used in Atkinson
et al. (2006) to investigate financial capability in the United Kingdom, while
others are taken from the Health and Retirement Study 2004 (Lusardi and
Mitchell, 2006). Even though this battery is not as rich as the ones devised
in other surveys (for instance van Rooij et al. (2008)), it covers a wide range
of topics concerning several financial decisions and so should be able to
capture financial knowledge rather than just numerical ability. Importantly,
“don’t know” is always an option, so that respondents are not forced to give
a random answer.
Table 2.1 presents the distribution of answers to the questions. On av-
erage 47% of respondents answers correctly to any of the questions. The
most difficult appears to be quiz 3 where only 27% answers correctly, and
only 8.84% can answer all 6 questions correctly (Table 2.2). However low the
correct response rate may seem, it is worth noticing that if respondents were
guessing they would give on average 33% correct answers (to quizzes 2-6),
while the actual response rate is higher for all questions but one. Nonethe-
less, the share of “do not know”s is quite high (more than 30%).
Summary statistics on individuals’ responses as well as demographic and
socioeconomic characteristics are reported in Table 2.3. On average, respon-
dents answered fewer than three questions correctly. The median household
had a net worth of about 158,000 euros, consisting of 150,000 euros in real
wealth and 7,000 euros in (gross) financial wealth holdings.
Table 2.4 documents the heterogeneity of financial literacy across de-
mographics and socioeconomic variables. Females answer on average worse
than males.2 Higher education is associated with a higher degree of financial
knowledge, probably because individuals with a higher level of general educa-
tion experience less difficulty in acquiring financial knowledge and therefore
2
It should be remarked that all respondents to the financial literacy module are con-
sidered to be ‘household heads’. This means that women’s literacy results reported here
may underestimate financial literacy among the overall female population, because many
female households heads are widows (38% among female respondents are widowed, but
only 5% among male respondents).
35
incur lower learning costs. The age profile of correct answers is concave (i.e.,
increases up to ages 41-60 and then declines). This might be because knowl-
edge accumulates only up to a certain age and then depreciates or because
of cohort effects, since older generations were not exposed to the current fi-
nancial complexity during their youth. Given that only one cross-section is
used, age and cohort effects cannot be disentangled. Respondents living in
the southern regions tend to have lower competencies. Working individuals
answer more questions correctly than the unemployed and those out of the
labor force. Financial wealth is positively associated with financial literacy,
as expected.
2.4 Empirical strategy

The dependent variable is an index of financial literacy indicating the num-
ber of correct answers given by the respondent. This measure may suffer
from the shortcomings detailed in chapter 1, but has the advantage of be-
ing synthetical. Moreover, this methodology is applied also in other studies
Lyons et al. (2007) and Guiso and Jappelli (2008). As shown in Table 2.2
(first row), this variable takes on integer, non-negative values and displays
a high frequency of zeroes.
The wealth measure used as the independent variable is gross financial
wealth, which equals the sum of deposits, government and private bonds,
stocks, and other securities. The top 1% of the wealth distribution is ex-
cluded from the regressions to avoid excess sensitivity of the results to out-
liers.
In addition to household financial wealth, the independent variables in-
clude gender, marital status, number of household components, level of gen-
eral education (expressed in number of years of schooling), a dummy vari-
able indicating whether someone in the household is more educated than the
household head, a second-order polynomial in age, dummy variables for the
region of residence, occupational dummies and income from work or pen-
sions. The dummy for the presence of a more educated household member is
included because the degree of financial literacy of other household members
is not elicited in the survey. This is a crude way to control for peer effects
within the family.
A second specification also includes indicators of the occupation and
education for both parents of the head of the household. Family background
is likely to affect not only the level of financial literacy, as in Lusardi et al.
(2010), but also the amount of wealth held by the family. Therefore, the
inclusion of these factors is meant to ensure that the coefficient for household
financial wealth does not actually capture the effect of the characteristics of
the family of origin on financial knowledge.
36
2.4.1 Accounting for endogeneity
As was mentioned before, in estimating the effect of wealth on financial
knowledge there may be a problem of endogeneity. Not only literacy is likely
to affect wealth accumulation, but it is also possible that an unobserved
factor, such as an underlying interest in finance, simultaneously influences
wealth accumulation and willingness to acquire financial knowledge.
The endogeneity issue is addressed by resorting to instrumental variables,
exploiting proxies for exogenous variations in household financial wealth. In
the baseline, the relation between wealth and literacy is estimated by the
generalized method of moments (GMM). The instruments adopted are a
dummy variable that takes the value of one if the family is living in a house
received as a bequest or gift, and zero otherwise, and the number of income
earners in the household. To be valid, instruments should not be correlated
with the dependent variables (literacy) but ought to be correlated with the
endogenous regressor (wealth). Using an indicator of house inheritance as
an instrument would not be appropriate in case richer households were sys-
tematically more likely to bequeath their dwellings than poorer households.
However, the home ownership rate in Italy is high – around 71%, accord-
ing to the 2001 census (Istat, 2004) – so it is not the case that only very
rich and knowledgeable families bequeath their houses. Moreover, more edu-
cated parents do not seem to be more likely to leave houses to their children,
at least in the SHIW sample. The number of income earners is clearly re-
lated to household wealth but there is no evident correlation with financial
knowledge. A robustness check on the instruments is in Section 2.5.1.
2.5 Estimation results

The empirical estimates of column OLS(1) in Table 2.5 broadly confirm the
insights of the descriptive statistics. Having higher financial wealth is as-
sociated with an increasing degree of financial literacy. Females and the
widowed have lower financial literacy. The age profile of financial literacy is
concave. Being more educated is associated to a greater financial literacy,
suggesting that general education may decrease the cost of acquiring specific
financial knowledge. The presence of a more educated household member
than the household head predicts a higher level of literacy, indicating knowl-
edge sharing within the household, rather than specialization. White-collars
display a higher literacy level. Income has no significant effect.
Column OLS(2) shows a specification where some characteristics of the
family of origin are included. The effect of household financial wealth is
virtually unchanged.
Column GMM(1) of Table 2.6 displays the first and second stage of a
GMM regression where the endogenous wealth variables are instrumented
37
with the number of earners in the household and whether the family is living
in a house received as inheritance of gift.
The first stage regression shows that the instruments positively and sig-
nificantly affect accumulation. The explanatory power and validity of in-
struments is confirmed by the statistics reported at the bottom of the table.
The F test on excluded instruments is above 10 (the value conventionally
used to exclude a weak instrument problem), and the Hansen’s J test of
over-identification of all the instruments supports the null hypothesis of in-
strument validity. The second stage regression of financial literacy shows
that the effect of wealth is stronger than what measured by the OLS re-
gression of Table 2.5: an increase in financial wealth by 100 thousand euro
induces the individual to learn as much as to answer correctly to about 1.7
additional questions (0.5 in the OLS). The effect of most covariates remains
unchanged. The inclusion of education and occupation of the parents re-
duces only slightly the explanatory power of financial wealth on financial
knowledge (Column GMM(2)).
2.5.1 Robustness checks

This section discusses several robustness checks concerning the financial lit-
eracy index, the instruments, the construction of the wealth variable, and
the estimation methodology.
Different difficulty of the questions
As reported in Table 2.1, some questions appear to be more difficult

than others. As a robustness check, additional regressions were run using
the weighted number of correct answers as the dependent variable, where
each question is weighted by its difficulty (proxied by the average percentage
of correct answers in the sample). Since the results are only marginally sen-
sitive to this adjustment, the unweighted financial literacy index is adopted
in all specifications.
Alternative instruments
One might argue that an indicator of house inheritance is not convincing

as an instrument for financial wealth. In Table 2.7 I estimate the same equa-
tion as in Table 2.6, using as instruments two dummy variables: one takes
the value one when there are two earners in the household, and the other
takes value one when there are three of more income earners, controlling for
the number of household members (the omitted category is less than two
earners).3 The results are qualitatively the same as in Table 2.6.
3
The reason for using two dummies is to allow the computation of the Hansen J test for
38
No financial wealth
A sizeable share of the sample (15.9%) reports having no financial wealth,

and financial illiteracy may be one of the reasons why some individuals have
zero financial assets. The GMM regression reported in column GMM(3) of
Table 2.8 shows the effect of having positive financial wealth on the degree
of financial literacy. The dummy variable for positive financial wealth is in-
strumented with the number of income earners in the household. As before,
the effect is positive and significant.
Total household wealth
Among the papers reviewed in Section 2.2, van Rooij et al. (2008) pointed
to the result that financial literacy should influence the total amount of
wealth accumulation. Moreover, there is a possibility that financial literacy
affects not only the decision to accumulate more or less financial assets, but
also the choice to allocate wealth between financial and real assets. For these
reasons, the analysis is repeated using as an independent variable the value
of the total (net) household wealth, instead of its sole financial component.
The GMM regression reported in column GMM(4) of Table 2.8 shows the
effect of net household wealth on the degree of financial literacy. As before,
the effect remains positive and significant.
Discrete choice model
Given the nature of the dependent variable – taking only integer and
non-negative values, with an excess of zeroes – the model is also estimated
by ordered probit4 , instrumenting wealth by means of the control function
approach.5
instruments validity. However, the same results hold when the number of income earners
– as a single continuous variable – is used as an instrument (results not reported).
4
A count data model, and in particular a zero-inflated poisson (ZIP) model, would also
be suited. However I am not aware of an appropriate technique to deal with endogeneity
in the specific case of the ZIP model. This is why I resort to an ordered probit model, to
which the control function approach can be easily extended.
5
When estimating a probit model with a continuous endogenous variable, the model
can be written as
y1∗ = z 1 δ 1 + α1 y2 + u1
y2 = z 1 δ 21 + z 2 δ 22 + v2 = zδ 2 + v2
y1 = 1[y1∗ > 0]
where (u1 , v2 ) has a zero mean, bivariate normal distribution and is independent of z.
The two-step approach due to Rivers and Vuong (1988) consists in
- running an OLS regression of y2 on z and saving residuals v̂2
39
The use of ordered probit amounts to treating the dependent variable
as if it were ordinal rather than cardinal, that is interpreting its values as
“very high literacy”, “high literacy”,“medium literacy” and so on. The or-
dered probit model has a very good predictive power. Figure 2.3 compares
observed frequencies for the outcomes of the dependent variable with (av-
erage) predicted probabilities from the estimated models, showing that the
ordered probit model estimates (whether instrumented or not) can repro-
duce closely (and better than a count data model) the distribution of the
financial literacy index.
Table 2.9 shows the results of the ordered probit estimation where the
probability of answering to a given number of financial literacy questions
depends on financial wealth and other regressors. Each column reports
marginal effects – computed at mean values – for each of the outcomes of
the dependent variable (that can take integer values from 0 to 6). Marginal
effects for dummy variables are computed accounting for their discrete na-
ture.
The first stage regression is identical to the one in Table 2.6. The signifi-
cance of the coefficients relative to the first stage residuals can be interpreted
as a test of the endogeneity of the instrumented variable. Even though in
this case it is possible to reject the endogeneity of financial wealth, there
are strong theoretical reasons that induce to instrument it anyway. Again,
wealth has a positive effect on the probability of answering correctly to a
higher number of questions. The effect of gender, years of schooling, age,
and other covariates goes in the same direction indicated by previous esti-
mations.
2.6 Concluding remarks

Even a basic knowledge of financial principles has proven to be important for
the accumulation of retirement savings (Lusardi and Mitchell, 2007a). Yet,
many households lack such competencies. Gaining insights on the factors
that drive financial knowledge acquisition can have important implications
on which policies are likely to be more effective in improving financial aware-
ness and sophistication.
This paper contributes to the literature on financial literacy by investi-
gating its determinants in Italy and by assessing the role of wealth in ex-
plaining the degree of literacy. If one assimilates the acquisition of financial
- running a probit regression of y1 on z 1 , y2 and v̂2 . This yields consistent estimators
of coefficients scaled by (1−ρ12 )1/2 , with ρ1 = Corr(u1 , v2 ).
1
Moreover, the p-value on v̂2 is a valid test of the null hypothesis that y2 is exogenous. For
a thorough explanation of this procedure see Rivers and Vuong (1988) and (Wooldridge,
2002, p. 472). This procedure can be easily extended to ordered probit response models
(Wooldridge, 2007).
40
knowledge to a form of human capital investment, where the benefit from
such investment is given by the ability to obtain higher risk-adjusted rates
of return on one’s own assets, then the amount of wealth held by the house-
hold may be crucial in explaining the learning effort and the widespread
lack of financial knowledge (Delavande et al., 2008). The endogenous re-
lation between wealth and literacy is taken into account by instrumenting
appropriately household wealth variables.
The results show that the effect of socio-demographics is analogous to
that found in the previous literature for other countries. Moreover, there
is evidence that wealth matters for the acquisition of financial knowledge
also controlling for its endogeneity. This suggests that the low level of lit-
eracy among Italian households may also reflect the level of their financial
holdings. However, the effect of wealth is quite small, meaning that only
individuals endowed with large amounts of wealth are encouraged to learn
more. Therefore, active interventions – by appropriately designing defaults,
by strengthening financial education among more vulnerable groups, or by
devising ways to help people plan ahead – are needed to improve financial
decision making and to put individuals in the condition to face adequately
current and future challenges.
A final remark concerns the fact that a more recent wave of the Survey on
Household Income and Wealth became available (e.g. the one for 2008) and
its financial literacy module contains some of the 2006 questions. In future
work, this chapter will be extended exploiting these new data. In particular,
this extension will allow to monitor financial literacy developments over time
(even if over a short time span), and it will improve the robustness of the
results, by allowing to control for unobserved heterogeneity.
41
Appendix: Tables and figures Indagine sui bilanci delle famiglie 2006 pag.22 Cartellini
Prima Rotazione FIGURA 1
National Saving Bank

Account statement as of 31/05/2006
Account No 678 987654 321
DATE VALUE REF. DESCRIPTION WITHDRAWALS DEPOSITS
*** *** *** PREVIOUS BALANCE AS OF 05/05/2006 320
01/05/2006 30/04/2006 1007 PHONE BILL PAYMENT, PERIOD 01/03/2006 - 30/04/2006 65
02/05/2006 01/05/2006 1008 WITHDRAWAL DEBIT CARD N. 10 100
27/05/2006 28/05/2006 1010 PAYROLL DEPOSIT 1.100

28/05/2006 27/05/2006 1011 CHEQUE N. 3036 187
YOUR ORDER IN FAVOR OF MR PAOLO ROSSI
29/05/2006 28/05/2006
1012 RENT PAYMENT APRIL 800
29/05/2006 28/05/2006 1013 FEES FOR TRANSACTION No 1012
1
31/05/2006 30/05/2006 1014 PURCHASE CARD N. 10.
ON 28/05/2006 CHEMIST SHOP 88
31/05/2006 30/05/2006 1015 REFUND NURSERY SCHOOL FEES 100
*** *** *** BALANCE AFTER THE ABOVE MENTIONED TRANSACTIONS 279
Figure 2.1: Figure for Quiz 1
Market value
180
160 INVESTMENT FUND 1
140
120
100
80
INVESTMENT FUND 2
60
40
20
2003 2004 2005 2006
Figure 2.2: Figure for Quiz 3
42
Figure 2.3: Predicted probabilities
43
Table 2.1: Answers to financial literacy questions (in %)
quiz1 quiz2 quiz3 quiz4 quiz5 quiz6 Average
Correct 50.75 60.5 27.23 39.6 51.33 53.61 47.17

Incorrect 6.44 9.52 35.37 31.96 15.53 12.68 18.58
Don’t Know 42.81 29.98 37.4 28.43 33.14 33.72 34.25
Total 100 100 100 100 100 100 100

N obs 3,992 3,992 3,992 3,992 3,992 3,992 3,992
Table 2.2: Distribution of correct, incorrect, and ‘do not know’ answers
0 1 2 3 4 5 6 Total
Correct 18.86 10.25 13.73 16.21 16.93 15.18 8.84 100
Incorrect 38.58 29.51 18.39 9.54 3.43 0.45 0.1 100
Don’t Know 36.9 18.66 9.92 7.29 6.46 5.34 15.43 100
Table 2.3: Summary Statistics
Mean Median Std. Dev.

Number of correct answers (financial literacy index) 2.83 3 1.95
Number of incorrect answers 1.11 1 1.16
Number of “don’t know” answers 2.05 1 2.22
Age 57.43 58 15.61
Years of schooling 9.21 8 4.66
Received house as inheritance/gift (dummy) 0.21 0 0.41
Number of earners in the household 1.68 2 0.76
Household net worth (thousands of euros) 252.74 157 516.69
Household gross financial wealth (thousands of euros) 26.12 6.93 79.17
Household real wealth (thousands of euros) 233.61 151 479.84
44
Table 2.4: Number of correct answers by demographic characteristics
Frequency Mean Median
Gender
Men 2,508 3.16 3
Women 1,484 2.27 2
Education
None 226 0.91 0
Primary 1,031 1.92 2
Secondary 1,114 2.83 3
High school 1,268 3.60 4
College and over 353 3.95 4
Age class
≤30 136 2.85 3
31-40 549 3.28 3
41-50 791 3.27 4
51-60 846 3.31 3
61-70 761 2.72 3
71-80 637 2.02 2
>80 272 1.34 1
Area of residence
North-west 1,034 3.09 3
North-east 878 3.13 3
Center 785 3.20 4
South 833 2.06 2
Isles 462 2.42 2
Occupational status
Employee 1,413 3.37 4
Self-employed 397 3.69 4
Unemployed 105 2.37 2
Retiree 1,775 2.34 2
Other out of labour force 302 2.25 2
Financial wealth (gross) quintiles

1 (Poorest) 838 1.71 1
2 832 2.64 3
3 732 2.68 3
4 811 3.34 4
5 (Richest) 779 3.84 4
Note: Other out labor force include first-job seekers, students, and homemakers.
45
Table 2.5: Financial literacy determinants – OLS estimates
OLS (1) OLS (2)

Financial wealth (100k) 0.523*** 0.499***
(0.08) (0.08)
Female -0.344*** -0.360***
(0.07) (0.06)
Single -0.027 -0.001
(0.10) (0.10)
Divorced 0.141 0.100
(0.12) (0.12)
Widow(er) -0.380*** -0.374***
(0.09) (0.09)
Num H components 0.005 -0.003
(0.03) (0.03)
Age 0.061*** 0.061***
(0.01) (0.01)
Age squared -0.001*** -0.001***
(0.00) (0.00)
Years schooling 0.117*** 0.099***
(0.01) (0.01)
Better Edu than HH 0.393*** 0.371***
(0.07) (0.07)
Blue-collar -0.165* -0.138
(0.10) (0.10)
White-collar/Teacher 0.186* 0.165*
(0.10) (0.10)
Manager 0.188 0.170
(0.14) (0.14)
Entrepr/Profession 0.011 0.026
(0.16) (0.16)
Self-employed 0.288** 0.257**
(0.13) (0.12)
Inc work/pens (th.) 0.003 0.002
(0.00) (0.00)
F of HH: Blue-collar 0.286***
(0.08)
F of HH: White-coll/Teach 0.448***
(0.12)
F of HH: Manager 0.594***
(0.17)
F of HH: Entrep/Profession 0.331*
(0.19)
F of HH: Self-employed 0.502***
(0.10)
M of HH: Blue-collar 0.050
(0.09)
M of HH: White-coll/Teach 0.227
(0.17)
M of HH: Manager -0.190
(0.41)
M of HH: Entrep/Profession -0.072
(0.30)
M of HH: Self-employed -0.277**
(0.12)
F of HH: Primary 0.207**
(0.10)
F of HH: Secondary 0.070
(0.13)
F of HH: High school+ 0.088
(0.16)
M of HH: Primary 0.162*
(0.09)
M of HH: Secondary 0.295**
(0.13)
M of HH: High school+ 0.043
(0.19)
Regional dummies yes yes
Constant 0.614 0.208

(0.39) (0.39)
N obs 3953 3906
R-Squared 0.312 0.332
Adj. R-Squared 46
0.306 0.323
Note: Standard errors (in parentheses) are robust to heteroskedasticity. De-
pendent variable: number of correct answers. Model: linear model estimated
by OLS. Significance: *** p<0.01, ** p<0.05, * p<0.1. Base categories include
males, being married, being out of the labor force (i.e., retired, homemaker,
etc.) and unemployed.
Table 2.6: Financial literacy determinants – GMM estimates
GMM (1) GMM (2)

First stage Second stage First stage Second stage
Dep Var : Fin W (100k) Fin Lit Fin W (100k) Fin Lit
Financial wealth (100k) 1.711** 1.629**
(0.76) (0.80)
Female -0.014 -0.330*** -0.015 -0.346***
(0.01) (0.07) (0.01) (0.07)
Single -0.033* 0.002 -0.038* 0.035
(0.02) (0.10) (0.02) (0.10)
Divorced -0.046** 0.200 -0.051** 0.161
(0.02) (0.13) (0.02) (0.13)
Widow(er) -0.031 -0.331*** -0.035* -0.325***
(0.02) (0.10) (0.02) (0.10)
Num H components -0.005 -0.007 -0.006 -0.011
(0.01) (0.03) (0.01) (0.03)
Age 0.010*** 0.047*** 0.010*** 0.048***
(0.00) (0.01) (0.00) (0.02)
Age squared -0.000*** -0.001*** -0.000*** -0.001***
(0.00) (0.00) (0.00) (0.00)
Years schooling 0.017*** 0.096*** 0.016*** 0.080***
(0.00) (0.02) (0.00) (0.02)
Better Edu than HH 0.028* 0.344*** 0.030** 0.322***
(0.01) (0.08) (0.01) (0.08)
Blue-collar -0.150*** 0.011 -0.146*** 0.025
(0.02) (0.15) (0.02) (0.15)
White-collar/Teacher -0.111*** 0.315** -0.110*** 0.287**
(0.02) (0.13) (0.02) (0.13)
Manager -0.051 0.245 -0.039 0.211
(0.05) (0.15) (0.05) (0.15)
Entrepr/Profession -0.061 0.078 -0.085* 0.118
(0.04) (0.17) (0.05) (0.18)
Self-employed -0.054* 0.336** -0.063** 0.314**
(0.03) (0.14) (0.03) (0.14)
Inc work/pens (th.) 0.008*** -0.006 0.008*** -0.006
(0.00) (0.01) (0.00) (0.01)
Parent’s occupation dummies yes yes
Parent’s education dummies yes yes
Region dummies yes yes yes yes
House as inheritance/gift 0.058*** 0.053***

(0.01) (0.01)
Num of earners 0.046*** 0.044***
(0.01) (0.01)
Constant -0.341*** 1.049** -0.336*** 0.625
(0.07) (0.48) (0.07) (0.49)
N obs 3953 3953 3906 3906
Adj. R-Squared 0.210 0.265 0.219 0.286
Uncentered R-Squared 0.391 0.765 0.401 0.773
Weak instrument F 23.53 20.26
Hansen J (overid of all instruments) 1.931 2.354
Hansen J p-value 0.165 0.125
Note: Standard errors (in parentheses) are robust to heteroskedasticity. Dependent variable: number
of correct answers. Model: linear model estimated by GMM. Significance: *** p<0.01, ** p<0.05,
* p<0.1. Base categories include males, being married, being out of the labor force (i.e., retired,
homemaker, etc.) and unemployed.
47
Table 2.7: Robustness check: Different instruments. Financial literacy de-
terminants – GMM estimates
GMM (1) GMM (2)

Dep Var : Fin W (100k) Fin Lit Fin W (100k) Fin Lit
Financial wealth (100k) 2.225** 2.224*

(1.10) (1.17)
Two earners 0.029** 0.026**

(0.01) (0.01)
Three+ earners 0.104*** 0.097***
(0.03) (0.03)
Parent’s occupation dummies yes yes

Parent’s education dummies yes yes
N obs 3953 3953 3906 3906

Adj. R-Squared 0.205 0.221 0.215 0.237
Hansen J (overid of all instruments) 0.955 0.656
Note: Standard errors (in parentheses) are robust to heteroskedasticity. Dependent variable: num-
ber of correct answers. Model: linear model estimated by GMM. Other regressors not reported:
same as in Table 2.5. Significance: *** p<0.01, ** p<0.05, * p<0.1.
Table 2.8: Robustness check: alternative mesures of wealth. Financial liter-

acy determinants – GMM estimates
GMM (3) GMM (4)

Dep Var : Fin W >0 Fin Lit Total Net W (100k) Fin Lit
Fin wealth > 0 3.303**

(1.36)
Net worth (100k) 0.401**
(0.16)
Num of earners 0.035*** 0.304***
(0.01) (0.06)
Parent’s occupation dummies yes yes yes yes

Parent’s education dummies yes yes yes yes
N obs 3906 3906 3904 3904

Adj. R-Squared 0.174 0.140 0.292 0.192
Note: Standard errors (in parentheses) are robust to heteroskedasticity. Dependent variable: num-
ber of correct answers. Model: linear model estimated by GMM. Other regressors not reported:
same as in Table 2.5. Significance: *** p<0.01, ** p<0.05, * p<0.1.
48
Table 2.9: Robustness check: discrete choice model. Financial literacy de-
terminants – IV ordered probit estimates
Low literacy Medium literacy High literacy

0 1 2 3 4 5 6
Fin Wealth (100k) -0.279* -0.129* -0.095* 0.014 0.147* 0.216* 0.125*
(0.15) (0.07) (0.05) (0.01) (0.08) (0.11) (0.07)
Female 0.054*** 0.024*** 0.017*** -0.004*** -0.028*** -0.040*** -0.022***
(0.01) (0.00) (0.00) (0.00) (0.01) (0.01) (0.00)
Single -0.007 -0.003 -0.002 0.000 0.003 0.005 0.003
(0.01) (0.01) (0.01) (0.00) (0.01) (0.01) (0.01)
Divorced -0.027* -0.014 -0.011 -0.000 0.014* 0.023 0.014
(0.02) (0.01) (0.01) (0.00) (0.01) (0.01) (0.01)
Widow(er) 0.050*** 0.021*** 0.014*** -0.005** -0.026*** -0.035*** -0.019***
(0.02) (0.01) (0.00) (0.00) (0.01) (0.01) (0.01)
Num H components 0.002 0.001 0.001 -0.000 -0.001 -0.001 -0.001
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Age -0.007*** -0.003*** -0.002*** 0.000** 0.004*** 0.006*** 0.003***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Age squared 0.000*** 0.000*** 0.000*** -0.000** -0.000*** -0.000*** -0.000***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Years schooling -0.011*** -0.005*** -0.004*** 0.001** 0.006*** 0.008*** 0.005***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Better Edu than HH -0.043*** -0.021*** -0.016*** 0.001 0.023*** 0.035*** 0.021***
(0.01) (0.01) (0.00) (0.00) (0.01) (0.01) (0.01)
Blue-collar -0.004 -0.002 -0.001 0.000 0.002 0.003 0.002
(0.02) (0.01) (0.01) (0.00) (0.01) (0.02) (0.01)
White-collar/Teacher -0.035* -0.018 -0.014 -0.000 0.018* 0.030 0.019
(0.02) (0.01) (0.01) (0.00) (0.01) (0.02) (0.01)
Manager -0.026 -0.013 -0.010 -0.000 0.014 0.022 0.014
(0.02) (0.01) (0.01) (0.00) (0.01) (0.02) (0.01)
Entrepr/Self-empl -0.027* -0.013 -0.011 0.000 0.014* 0.023 0.014
(0.02) (0.01) (0.01) (0.00) (0.01) (0.01) (0.01)
Inc work/pens (th.) 0.001 0.001 0.000 -0.000 -0.001 -0.001 -0.001
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Fitted residuals 0.208 0.096 0.071 -0.010 -0.110 -0.161 -0.093
(0.15) (0.07) (0.05) (0.01) (0.08) (0.11) (0.07)
Parents’ occup dummies yes
Parents’ edu dummies yes
Region dummies yes
N obs 3906
Log-likelihood -6699.37
Pseudo R-Squared 0.105
Note: Bootstrapped standard errors (100 replications) in parentheses. Dependent variable: number of
correct answers. Model: Ordered Probit instrumented with Control Function. Each column reports marginal
effects for a given outcome of the dependent variable. Instruments are a dummy for house inheritance and
the number of income recipients in the household. First-stage regressions are displayed in Table 2.6. Base
categories include males, being married, being out of the labor force (i.e., retired, homemaker, etc.) and
unemployed. Other regressors not reported: same as in Table 2.5. Significance: *** p<0.01, ** p<0.05, *
p<0.1
49
Chapter 3
Financial literacy and

financial advisors:
substitutes or complements?
with Riccardo Calcagno
3.1 Introduction
The growing literature on financial literacy suggests that consumers’ knowl-
edge of basic financial principles and products is quite scarce, and that it
may not be sufficient to guarantee that households make sound financial de-
cisions. For instance, more financially illiterate households are more prone
to lack of planning for retirement, portfolio under-diversification, and over-
indebtedness (Lusardi and Tufano, 2008; Lusardi and Mitchell, 2006, 2007a;
Guiso and Jappelli, 2008; Kimball and Shumway, 2007). Moreover, a lack of
financial knowledge is particularly worrying as long as consumer’s ignorance
can be exploited in retail financial markets as a source of market power by
firms that increase the complexity of their financial products strategically
(Carlin, 2009).
However, one may argue that a low level of households’ financial literacy
does not necessarily imply that they will make poor financial decisions. At
least in principle, households can seek advice and guidance from qualified
sources (Bernheim, 1998). As long as households can resort to the advice
of experts for their financial decisions, external advice can be seen as a
substitute for learning by one’s self, thus avoiding the effort of acquiring
financial expertise.
Indeed, common motivations for the demand for professional financial
advice are that advisors are more knowledgeable about financial markets
than non-professional investors (e.g., because they can exploit economies of
50
scale in information acquisition), and that they can mitigate households’
behavioral biases (Bluethgen et al., 2008).
However, there are reasons to believe that the market for financial ad-
vice is imperfect and that the mere availability of qualified assistance will
not necessarily translate into high-quality decision making. Not only ad-
visors/brokers do not appear to fully correct investors’ behavioral biases
(Shapira and Venezia, 2001; Mullainathan et al., 2010), but it is apparent
that conflicts of interest may affect the supply of financial advice. When
financial intermediaries are at the same time acting as advisors and selling
financial products, they may be tempted of “misselling”, i.e., selling a prod-
uct that does not match a customer’s specific needs (European Commission,
2009).
Several authors studied the issue of advisors’ conflicts of interests in a
strategic communication setting, modeling the interaction between an un-
informed investor and an informed advisor whose preferences are ‘biased’
towards a partisan objective (e.g. through commissions and ‘kickbacks’). In
the classic ‘cheap-talk’ communication game of Crawford and Sobel (1982),
direct and costless communication does not necessarily result in full infor-
mation transmission: when the preferences of the sender (advisor) and of
the receiver (investor) are different due to a bias in the sender’s utility, not
all information is successfully communicated in equilibrium.
Other works focused on the origins of these conflicts of interest. While
in most cases such bias is simply assumed, Inderst and Ottaviani (2009)
allow the conflict of interest between the advisor and the investor to arise
endogenously from the agency relation between the advisor and the firm,
where the latter aims at setting the optimal compensation so as to induce
its direct marketing agent to sell but not to missell. In modeling the conflict
of interests of financial advisors, Krausz and Paroush (2002) show that the
optimal level of advisor’s deception is related, among the others, to the mar-
ket structure represented by the level of competition. Also in Bolton et al.
(2007) the bias of institutions selling financial products is related to market
competitiveness, where competition both reduces the gains from lying and
induces financial institutions to disclose information in order to differentiate
their products. Advisor’s reputational concerns do not necessarily give the
right incentives to truthfully report information (Ottaviani and Sørensen,
2006).
For our purposes, a particularly relevant strand of this literature is the
one focusing on investors’ characteristics and on how these affect informa-
tion transmission. Ottaviani (2000) allows investors to differ with respect
to their degree of strategic sophistication: a perfectly rational receiver who
knows the communication game is never fooled in equilibrium into taking
an action which is not in her best advantage ex post, while a naive investor
may take the advice literally, therefore choosing to delegate. The nature of
the communication equilibrium changes drastically according to investor’s
51
naivety. Georgarakos and Inderst (2010) allow investors’ decision to hold
risky assets and to rely on advisor’s recommendation to depend on the per-
ception of their own financial capability, as well as on their perceived legal
protection and trust in advice. Clearly, the model predicts that probability
of relying on advice is higher when perceived financial capability is lower
and trust is higher. Finally, Hackethal, Inderst, and Meyer (2010) introduce
investors’ knowledge of financial matters and their perception of advisor’s
conflict of interest in a game of cheap talk, where both elements reduce the
likelihood that the customer follows advisor’s recommendation.
In this paper we analyze the agency relationship between an advisor /
intermediary and an investor, where the latter is poorly informed about
the distribution of the risky asset future returns, and the (informed) advisor
earns a commission upon selling the risky product while facing a cost for mis-
selling it (e.g. costs related to a loss of reputation or expected legal costs for
being sued). The final utility of both advisor and investor depend upon the
investment decision of the latter. With respect to the previous literature, we
exploit the heterogeneity of investor’s financial information and knowledge
in affecting the degree of information transmission in equilibrium.1
We show that there are cases when it is more profitable for the advi-
sor not to reveal the information he possesses, and that this happens when
investors are less knowledgeable. Moreover, we find that – if we allow in-
vestors to be fully rational and to observe the structure of advisor’s selling
incentives – advisors are visited only by the most knowledgeable customers.
These results are confirmed when we allow investor’s information precision
to be endogenously determined by their (exogenous) level of financial liter-
acy.
These findings are consistent with much of the empirical literature and
with the empirical findings of chapter 4. Various authors suggested that
investors with higher financial literacy are more likely to use formal sources
of information and advice, including financial advisors, while ‘illiterate’ ones
prefer informal sources, such as friends, relatives, colleagues and neighbors
(Lusardi and Mitchell, 2006; van Rooij et al., 2007). Moreover, Hackethal,
Haliassos, and Jappelli (2009) show that advisors are matched with wealth-
ier and older investors, rather than with poorer and inexperienced ones,
suggesting that there may be a complementarity between financial knowl-
edge and the demand for advice. On the contrary, from an empirical point
of view Hackethal, Inderst, and Meyer (2010) show that investors reporting
that they keep themselves informed are less likely rely on the advice of their
1
Moreover, our work differs also from that of Hackethal, Inderst, and Meyer (2010).
They assume that, upon receiving advisor’s recommendations, the customer has to decide
whether to follow his advice or not, and they focus on the informative equilibrium. On
the contrary, in our model we focus on the different informativeness of the equilibria and
the crucial decision for the investor is to visit the advisor or not, since it is always (never)
optimal for her to follow the advice when this is (not) informative.
52
financial advisor, conditional on receiving advice.
Our results suggest that the presence of non-independent advisors, who
at the same time provide advice and sell financial assets, does little to al-
leviate the problem of low financial literacy of some investors. Indeed, our
model shows that these advisors are rarely relied upon by low financial lit-
eracy investors, who need advice the most. We conclude then that there
is scope for financial literacy initiatives targeted to the population groups
with the highest private costs of accessing financial knowledge.
The rest of the paper is organized as follows. Section 3.2 presents the
model setup and characterizes both advisor’s decision about information
revelation and investor’s choice about consulting or not an advisor. Sec-
tion 3.3 introduces financial literacy and studies its effect both on optimal
information acquisition and on the relation with the advisor. Section 3.4
concludes.
3.2 The basic model

There are two agents: an informed intermediary who at the same time sells
a risky financial product and provides information to the customer, and a
buyer who is less informed than the seller about the distribution of the risky
asset payoff. We will refer to these agents as seller S and buyer B.
Investors can allocate their wealth between a risky and a riskless as-
set. The riskfree return rf is normalized to zero. The commonly known
distribution of the risky asset payoff r̃ is

rH 1/2
f (r̃) = (3.1)
rL 1/2
We assume that rH > 0, rL < 0 and Ef (r̃) [r̃] > 0 in order to depict a
situation where investors may incur real losses in case of an ill investment
decision, but where the risky asset provides an excess return over the riskless
one ex-ante.2
Before undertaking the investment, each investor can buy a private signal
si with precision π, where π = P r(si = ri |ri ) > 1/2, i.e. the signal is correct
with probability π. For instance, if the investor receives the signal si = rL ,
she bases her decisions upon E[r̃|si = rL ] = πrL + (1 − π)rH . Given that
rL < 0 and Ef (r̃) [r̃] > 0, when si = rL there is a level π0 ∈ [1/2, 1] such that
π0 rL + (1 − π0 )rH = 0. The importance of π0 will become evident later on.
The investor/buyer B is assumed to have mean-variance utility over
her final wealth W3 . In addition to the private signal si , she can decide
2
This means that we are restricting the analysis to those products that an uninformed
agent would buy. One can think of these risky assets as being sufficiently known among
the large public, or assets whose historical past returns are above the riskfree rate, such
as index mutual funds.
53
whether to ask for further information about the future realization of r̃ to
an intermediary who is informed about the true state of r̃. This intermediary
(henceforth the advisor) can, in turn, decide to reveal his information or not,
based on the incentives and costs he faces. Given any information set IB
the investment decision of B amounts to
γ
max E[U (W3 ) |IB ] = E[W3 |IB ] − V ar[W3 |IB ]
v∈[0,1] 2
s.t. W3 = W2 + vr̃
where v is the quota of initial wealth invested in the risky asset3 and rf = 0.
Given the distribution of returns in (3.1) and investor’s information set IB ,
the optimal investment in the risky asset is:
n E[r̃ |IB ] o
v ∗ = max 0, (3.2)
γV ar[r̃ |IB ]
and substituting for v ∗ in the objective function we obtain the ex-ante ex-
pected utility for investor B:
n 1 (E[r̃ |I ])2 o
B
E[U (W3 ) |IB ] = W2 + max 0, (3.3)
2 γV ar[r̃ |IB ]
In case the optimal portfolio v ∗ resulting from (3.2) were negative, then
we fix v ∗ = 0, due to short-selling constraints.4
The model has four periods. At t = 0 the investor chooses the precision
π of her private signal si . Then at t = 1 she first receives si = {rH , rL } and
then she decides whether to invest on her own or to consult an advisor who
knows the realized risky asset return. If at t = 1 the investor decided to
consult the advisor, then at t = 2 investor and advisor interact in a commu-
nication game where the advisor decides whether to disclose his information
or not. Then the investor chooses her portfolio on the basis of the whole
information set available, including the advisor’s message. Otherwise, if at
t = 1 the investor decided not to consult the advisor, then at t = 2 the
investor invests by herself, only on the basis of her signal si . At final date
t = 3 the return r̃ is realized.
In the next subsection we describe the communication game between
the advisor and the investor arising at t = 2 in case the investor decided to
demand his advice. Throughout the model we assume there are arbitrarily
small advisory fees ≥ 0. This ensures that our results are robust to the
3
It is well known that with CARA utility the optimal portfolio allocation is independent
of the initial wealth, that we then normalize to one for simplicity.
4
Notice that investors are only allowed to buy or not the risky product, but they cannot
short sell it. This is reasonable for most of private investors trading standard assets as
index funds, mutual funds and individual stocks.
54
introduction of a very competitive market for financial advice.
3.2.1 Advisor’s decision about information revelation

We start by analyzing period t = 2, when the advisor S and the investor B
play a communication game that we denote as (S, B) − game. The investor
enters this stage having already received a signal si ∈ R = {rH , rL } with a
given precision π.
Information sets. The advisor S knows the true state of r̃: using a stan-
dard terminology we say there are two types of sellers S = {S(rH ), S(rL )}.
He also knows the precision π of the buyer’s signal but not its realization.5
The investor B knows π, the realization of the signal si and the payoff
function of the advisor.
Strategies. The advisor decides which signal to deliver given his type.
Thus a strategy for the advisor is a mapping σS : {rH , rL } → 4R. The
investor chooses the optimal portfolio allocation as in (3.2), where IB =
{π, si , σS }.
Payoffs. Advisor’s payoff depends on the investor’s investment decision
and consists in a fixed commission F > 0 paid upon completing a trans-
action (sale) with the customer, i.e. whenever v ∗ > 0.6 7 Moreover, he
pays a penalty for misselling (as in Inderst and Ottaviani (2009)), repre-
senting “reputational costs”, expected legal costs for litigation procedures,
or the monetary costs of forgone customers, among others. In particular, we
assume that this cost is incurred with probability one whenever the signal
σS does not correspond to the true state, and that the cost is proportional
to the difference between the signal and the true state [σ(ri ) − ri ]2 .8 The
seller’s payoff is then US (ri ) = F|{v∗ >0} − [σ(ri ) − ri ]2 . The buyer’s payoff is
that in (3.3).
2
H −rL )
Assumption 1: (rH − rL )2 < F < (r(1−π 0)
.
Assumption 1 restricts the analysis to a meaningful set of parameters
in the following two ways. By imposing that advisor’s incentives are larger
than the cost of lying ensures that sometimes it may be optimal for the
5
We choose to relax the hypothesis that the seller knows the information contained in
the signal si . However, it would not be unreasonable to assume that the advisor possesses
this piece of information, because intermediaries in the European Union are supposed to
collect information on risk attitudes and prior experience of their customers in order to
comply with the EU Markets in Financial Instruments Directive (MiFID). We proved that
the set of equilibria of the game in this case looks qualitatively as the one presented in
the paper (the proof is available upon request to the authors).
6
Note that typically intermediaries receive higher fees when the client buys one of their
products than when a sale occurs.
7
The results for period t = 2 are unchanged if we assume that the advisor earns a
commission proportional to the amount bought by the investor f v ∗ (π, si ), instead of a
fixed commission F .
8
Results are qualitatively not dependent on this particular assumption on the cost
function.
55
advisor not to tell the truth. The second condition in Assumption 1 ensures
that advisor’s incentives are not too large to always offset the cost for not
telling the truth, even when the investor is relatively well informed, i.e. for
π ∈ [π0 , 1].
Equilibrium. A Perfect Bayesian Nash equilibrium in the communication
game (S, B) is defined by a set of strategies (σS∗ , v ∗ ) and beliefs p = Pr(rH ),
p : R → [0, 1] such that:
(i) for both types S(ri ), ri = {rL , rH }, σS∗ maximizes US (ri ) given the
optimal investment decision of the investor, v ∗ ;
(ii) the optimal portfolio v ∗ is equal to (3.2), where the information set is
IB = {π, si , σS∗ };
(iii) the belief distribution (p, 1 − p) is rational and consistent with σS∗ , i.e.
p = Pr(rH |π, si , σS∗ ).
We show that this equilibrium depends on the information set of the

buyer, and precisely on the level of π. In particular, for π ∈ [1/2, π0 ) and in
the absence of any other signals (i.e., before receiving advisor message σS ),
the investor would choose to invest a positive amount of wealth in the risky
asset v ∗ > 0 regardless of the signal si = {rH , rL } she received. On the
contrary, for π ∈ [π0 , 1] the investor’s strategy (irrespective of the message
σS ) would be to invest a positive amount of wealth in the risky asset v ∗ > 0
if and only if si = rH , while she chooses v ∗ = 0 for si = rL . The optimal
response of the advisor is different depending on the accuracy of the infor-
mation owned by the investor he faces.
Lemma 1. If Assumption 1 holds, then:

(i) whenever π ∈ [1/2, π0 ) there exists a unique pooling equilibrium (σ ∗ (rH ) =
rH ; σ ∗ (rL ) = rH );
(ii) whenever π ∈ [π0 , 1] there exists a unique fully revealing equilibrium

(σ ∗ (rH ) = rH ; σ ∗ (rL ) = rL ).
Proofs to all lemmas are in the appendix. Lemma 1 shows that investors
with relatively coarse information acquired on their own do not benefit from
the opportunity to consult a professional advisor. This is because a buyer
with π ∈ [1/2, π0 ) assign a low probability to the event r̃ = rL and so she
would choose v ∗ > 0 even if she receives signal si = rL . As a consequence,
seller S(rL ) has no incentives to reveal his true type (as long as F > (rH −
rL )2 ), because if he did so the investor would no longer buy the asset and
he would lose his commission F .
On the other hand, investors entering the game (S, B) with more precise
information do receive extra information when they consult a professional
56
advisor. This is because the buyer with π ∈ [π0 , 1] is informed enough to
choose v ∗ > 0 when si = rH but not when si = rL . Consequently, S(rL )
has no incentive to deviate from the fully revealing equilibrium: if he did so
he would still not earn F and he would have to pay the extra cost (rH −rL )2 .
Two insightful implications can be derived from Lemma 1:
- advisors are not useful to the investors who need them the most, be-
cause they fail to be a substitute to learning by one’s self. Given this,
we will see later that rational investors with a relative coarse informa-
tion do not demand advice, even if this has a negligible cost;
- financial intermediaries/advisors have a regressive effect on the distri-

bution of information among investors. They increase the information
of the relatively more informed but do not provide any additional in-
formation to the less informed.
3.2.2 Investor’s decision about consulting an advisor

At stage t = 1 the investor decides whether to consult a professional advisor
or not, after observing the realization of the signal si . She picks the optimal
choice comparing her utility in the two cases, correctly anticipating the
advisor’s behavior as outlined in Section 3.2.1 in case she decides to rely on
his advice. For tractability, we let U = W0 rH be the maximum utility B can
attain investing all her initial wealth W0 in the risky asset when she is sure
of the realization rH .9 Recall that the investor pays an (arbitrarily small)
advisory fee upon visiting the intermediary.
As before, investor’s decision depends on the level of the precision of her
acquired private signal π.
Lemma 2. If U is sufficiently large, then
(i) whenever π ∈ [1/2, π0 ) the investor will be indifferent between consult-

ing the advisor or not. For any arbitrarily small cost of advice she
will choose to invest autonomously (not consult the advisor);
(ii) whenever π ∈ [π0 , 1] the investor will strictly prefer to consult the
advisor.
Lemma 2 shows that, since advisors would provide void advice to the
least informed investors, the latter rationally do not visit them (as long
as investors know the structure of advisors’ incentives). As investors are
able to anticipate the informativeness of the advisor’s signal, advisors are
9
This bound U on utility is finite if the investor cannot borrow at rf to invest in the
risky asset.
57
consulted only by sufficiently informed investors who know they will receive
meaningful information.
This result also directly implies that investors with high signal precision
π ≥ π0 , by consulting an advisor, are able to implement the “first best”
investment decision, i.e. the one with complete information (because they
learn the true state of r̃ from the advisor). Instead, uninformed investors,
by not visiting the advisor, make investment mistakes and hence suffer from
ex-post losses, precisely because they are not sufficiently informed about the
true state. This in turn bears further implications:
- as far as asset’s market is concerned, advisors/intermediaries do not

eliminate noise trading from the market;
- as for asset prices, uninformed investors buy also in ‘bad times’, hence
generating noise.10
3.3 Endogenous information precision

So far we have assumed that π was given. Let us now consider the choice of
the optimal π ∗ at t = 0. For this purpose we introduce a further parameter
k indicating investor’s exogenous level of financial literacy. This will allow
us to verify what is the effect of financial literacy on the predictions of the
model.
At t = 0 the investor buys a signal si and she can decide its optimal
precision π ∗ . As in Peress (2004), this optimal level depends on the marginal
benefit of additional signal precision in terms of future utility and on the
marginal cost given by the effort of acquiring more information, where we
assume that this effort depends negatively on financial literacy k.
In order to compute π ∗ (k), the investor correctly anticipates the utility
she will obtain at t = 2 under all possible scenarios regarding si , π, and
the behaviour of the advisor (if consulted). As for the cost function c(π, k),
we assume that it is an increasing and convex function of effort and it is
2 c(π,k)
decreasing in financial literacy k: ∂c(π,k)
∂π > 0, ∂ ∂π 2 > 0, ∂c(π,k)
∂k < 0.
Using the results of Section 3.2.2 and equation (3.3), and recalling that
ex-ante the probability of receiving either signal si is

si = rH 1/2
f (si ) =
si = rL 1/2
we can write the ex-ante expected utility of investor B:11

10
The opposite, however, does not hold. This may be important to explain asset “bub-
bles”.
11
See Appendix for derivation of utility functions.
58
π∈[1/2,π0 ) 1 1
EUB = UB (π, si = rH ) + UB (π, si = rL ) − c(π, k) (3.4)
2 2
π∈[π0 ,1] 1 1 1
EUB = πU + (1 − π)U − c(π, k) = U − c(π, k) (3.5)
2 2 2
and the optimal precision π ∗ is determined by
π∈[1/2,π0 )
π ∗ (k) ∈ arg max EUB
π
The utility functions (3.4)-(3.5) together with the characterization of

π ∗ (k), allow us to study the effect of varying investor’s financial literacy k
on her choice about consulting a financial advisor.
Lemma 3. If the following conditions are satisfied

π∈[1/2,π0 )
∂ 2 EUB
(i) ∂π 2
< 0 with π ∗ < π0 ,
π∈[π0 ,1]
∂EUB
(ii) ∂π < 0 for π ∈ [π0 , 1],
∂ 2 c(π,k)
(iii) ∂k∂π < 0,
∗,adv ∗,self
∂[EUB −EUB ]
then ∂k > 0.
We discuss in the Appendix the relevance and appropriateness of condi-

tions (i)-(iii) and devote Section 3.3.1 to illustrate an example of a standard
cost function that satisfies these conditions.
Lemma 3 states that the difference between the maximum utility achiev-
able by consulting an advisor and the one achievable investing autonomously
is increasing in the level of financial literacy. This means that more literate
investors are more likely to consult an advisor.
Investors with lower financial literacy k, coeteris paribus, choose lower
levels of information precision π ∗ (k) and (by Lemma 2) are not using pro-
fessional advice. On the contrary, investors with greater financial literacy
k become more informed and then are more likely to consult the advisor
(and to receive informative signals from him). An analogous result is found
empirically in (Hackethal, Haliassos, and Jappelli, 2009), who show that ad-
visors are matched with wealthier and older investors, and not with poorer
and inexperienced ones. This can be interpreted as evidence of the fact that
advisors are consulted by more financially literate investors.
59
3.3.1 An analytical example
In this section we make an example on the functional form of c(π, k), showing
that it satisfies conditions (i)-(iii) of Lemma 3.
1
The candidate function is c(π, k) = k(1−π) 2 . Let us check conditions one
by one.
π∈[1/2,π0 )
∂ 2 EUB
(i) ∂π 2
< 0 with π ∗ < π0 .
π∈[1/2,π0 )
∂ 2 EUB
(i.a) ∂π 2
< 0 (concavity). The condition is satisfied for
A π 3 + (1 − π)3 6
3 3
<
2 π (1 − π) k(1 − π)4
that is
12π 3
Ak <
(1 − π)[π 3 + (1 − π)3 ]
2 +r 2 )
(rL
where A = H
γ(rH −rL )2
(i.b) π ∗ < π0 (maximum).
π∈[1/2,π )
π ∗ (k) ∈ arg max EUB 0
π
√
∗ 3kA ± k 2 A2 − 32kA
π (k) =
3kA + 16
where Ak ≥ 32 to ensure that π ∗ (k) is a√ real number, and
k2 A2 −32kA
where the relevant solution is π ∗ (k)1 = 3kA+3kA+16 because
∂π ∗ (k)1 3
∂k > 0. Note that we need to impose 32 ≤ Ak < (1−π)[π12π
3 +(1−π)3 ] ,
∗
which is true only for π > 2/3. In order to have that π < π0 we
also need to impose π0 > 2/3 which is true for rH /rL > −2.
π∈[π0 ,1]
∂EUB
(ii) ∂π < 0 for π ∈ [π0 , 1] (utility decreasing in π). We have that
π∈[π0 ,1]
∂EUB ∂c(π, k) 2
=− =− <0
∂π ∂π k(1 − π)3
∂ 2 c(π,k) −2
(iii) ∂k∂π = k2 (1−π)3
<0

We have analyzed the interaction between an informed intermediary who
at the same time sells a risky financial product and provides information
60
to the customer, and a buyer who is less informed than the seller about
the distribution of the risky asset payoff. Based on her prior knowledge,
the investor decides whether to consult the advisor for further information.
In turn, the advisor decides whether to reveal or not the information he
possesses, depending on the costs and incentives he faces.
The analysis provides a number of results. First, advisors are not infor-
mative towards less informed investors, while they provide valuable infor-
mation only to relatively more informed ones. This implies that advisors
are not useful to the investors who need them the most, because they fail
to be a substitute to learning by one’s self.
Second, if investors know the structure of advisor’s selling incentives,
advisors are visited only by sufficiently informed individuals who know they
will receive meaningful information. This result implies that only informed
investors, by consulting an advisor, implement the “first best” investment
decision, i.e. the one with complete information (because they learn the
true state of r̃ from the advisor), while uninformed investors, by not visiting
the advisor, may make investment mistakes and hence suffer from ex-post
losses.
Finally, higher financial literacy allows investors to obtain a higher (op-
timal) information precision about the distribution of asset’s return, and
hence to be more likely to receive reliable and informative advice.
These results provide a rationale for initiatives reducing the private costs
of knowledge acquisition, because they suggest that learning about finance is
necessary in order to make the right financial decisions even when financial
advisors are available. Moreover, they show that the presence of advisors
does little to alleviate the problem of low financial literacy, at least as long
as they are at the same time selling financial assets. It appears that non
completely independent financial advisors cannot be substitutes of individ-
ual financial literacy. As a specular result, these advisors are rarely relied
upon by low financial literacy investors, who need advice the most.
Appendix: Proofs
Proof of Lemma 1 : Let us start considering the case π ∈ [1/2, π0 ) :
(i) Existence. Remember that, if the investor were to base her portfolio
decision on her information set without any additional information
from the advisor, when π ∈ [1/2, π0 ) she would choose to invest v ∗ > 0
regardless of the realization of the signal si = {rH , rL } received.
The candidate equilibrium is a pooling equilibrium where σ(ri )∗ = rH
for both ri = {rH , rL } and where the equilibrium payoffs of the advisor
∗
are US(r = F and US(r ∗ = F − (rH − rL )2 .
H) L)
61
Consider a deviation σ(rL ) = rL . Observing such an out of equilibrium
message, the investor assigns a probability q = P r(rH |σ = rL ) to
the event that such message was sent by S(rH ). Notice that for any
belief q ∈]0, 1[ the equilibrium payoff S(rH ) obtains is larger than the
one he would obtain by deviating, that is US(r dev = max{F − (rH −
H)
2 2 2 ∗
rL ) , −(rH − rL ) } = F − (rH − rL ) < F = US(rH ) . On the contrary,
the deviation may be profitable for S(rL ) if q is such that the investor
buys v ∗ > 0, by Assumption 1 (i.e. F − (rH − rL )2 > 0). Hence, using
the intuitive criterion (Cho and Kreps, 1987), we can restrict the out
of equilibrium beliefs to q = 0. Under these beliefs, it is not profitable
for S(rL ) to deviate from the pooling equilibrium.
Finally, consider any deviation in mixed strategies, where for example
S(rL ) sends message σ(rL ) = rL with probability τ > 0. An investor
observing σ = rL even with a small probability assigns a higher belief
to the event that such message was sent by S(rL ) (i.e., again, it would
be more profitable to deviate for S(rL ) than for S(rH )). But then
S(rL ) would reveal her type sending σ(rL ) = rL and obtain a payoff
lower than in equilibrium.
Uniqueness. Let us show that in the region π ∈ [1/2, π0 ) the pooling

equilibrium (σ(ri )∗ = rH ) is unique.
– Rule out the perfectly revealing equilibrium (σ(rH ) = rH ; σ(rL ) =

∗
rL ). Equilibrium payoffs are US(r ∗
= F and US(r = 0. In this
H) L)
case it would be profitable for S(rL ) to deviate sending σ(rL ) =
dev = F −(r −r )2 since F −(r −r )2 > 0
rH and obtaining US(r L)
H L H L
by Assumption 1.
– Rule out the perfectly revealing equilibrium (σ(rH ) = rL ; σ(rL ) =
rH ). Equilibrium payoffs are US(r ∗ = F − (rH − rL )2 and
H)
∗
US(r = 0 − (rH − rL )2 . However, it is profitable for S(rH )
L)
to send σ(rH ) = rH (resulting in payoff US(r dev ∗
= F > US(r ),
H) H)
as well as it is profitable for S(rL ) to send message σ(rL ) = rL
dev
(resulting in payoff US(r ∗
= 0 > US(r ).
H) L)
– Rule out partially revealing equilibria, where σ(rH ) = (rH , rL )

with probability (m, 1 − m) and σ(rL ) = (rH , rL ) with probabil-
ity (n, 1 − n), where 0 < m < 1 and 0 < n < 1. A necessary
condition for the existence of such a mixed strategy equilibria is
that, for each type of seller, the payoff obtained by playing either
signal should be the same in equilibrium. This is clearly not ver-
ified, as long as F 6= (rH − rL )2 . For instance the payoff for the
high-type seller S(rH ) playing σ = rH can be either F or 0, while
the payoff for the high-type seller playing σ = rL can be either
62
F − (rH − rL )2 or −(rH − rL )2 .
Now consider the case π ∈ [π0 , 1).
(ii) Existence. Note that if the buyer does not receive any additional
information from the seller (i.e. as in a pooling equilibrium) when
π ∈ [π0 , 1) the investor chooses v ∗ > 0 when si = rH , and v ∗ = 0 for
si = rL . Since the advisor does not observe the realization of the signal
si = (rH , rL ), a high-type advisor will expect v ∗ > 0 with probability π
and v ∗ = 0 with probability (1 − π). On the contrary, a low-type seller
expects v ∗ > 0 with probability (1 − π) and v ∗ = 0 with probability π.
The candidate equilibrium is a fully revealing equilibrium where σ(ri )∗ =
ri for ri = {rH , rL }, and where the equilibrium payoffs of the seller are
∗
US(r = F and US(r∗ = 0.
H) L)
Consider a unilateral deviation σ(rH ) = rL by S(rH ). Given investor’s

prior beliefs (π, 1−π), this deviation is not profitable because the payoff
would be US(rdev = πF − (rH − rL )2 < US(r ∗ .
H) H)
Consider now a unilateral deviation σ(rL ) = rH by S(rL ). This would

∗
give the seller the payoff US(rL ) = (1 − π)F − (rH − rL )2 < 0 = US(r L)
by Assumption 1 and by considering that π > π0 .
Finally, consider a deviation in mixed strategies, where seller S(rH )
sends message σ(rH ) = rL with probability τ > 0. This, again, is not
a profitable deviation because it would result in a payoff πF − (rH −
∗
rL )2 < US(r when σ(rH ) = rL realizes.
H)
Uniqueness. Let us prove that in the region π ∈ [π0 , 1) the fully

revealing equilibrium (σ(ri )∗ = ri ) is unique by showing that all other
equilibria do not exist:
– Pooling equilibrium (σ(rH ) = rH ; σ(rL ) = rH ). If this strategy

∗
profile was an equilibrium the payoffs would be US(r = πF and
H)
∗ 2
US(rL ) = (1 − π)F − (rH − rL ) . But this cannot be true since
then it would be profitable for S(rL ) to send message σ(rL ) =
dev
rL obtaining US(r = 0 since (1 − π)F − (rH − rL )2 < 0 by
L)
Assumption 1.
– Pooling equilibrium (σ(rH ) = rL ; σ(rL ) = rL ). If this was an
∗
equilibrium, the payoffs would be US(r = πF − (rH − rL )2 and
H)
∗
US(r = (1 − π)F . Again, this is not true since then it would
L)
be profitable for S(rH ) to send message σ(rH ) = rH obtaining
dev
US(r ∗
= F > US(r = πF − (rH − rL )2 .
H) H)
63
– Partially revealing equilibria, where σ(rH ) = (rH , rL ) with prob-
ability (m, 1−m) and σ(rL ) = (rH , rL ) with probability (n, 1−n),
where 0 < m < 1 and 0 < n < 1. Analogous to the proof for
point (i).
Proof of Lemma 2 : Let us compare the utility the investor would obtain
by consulting the advisor and by investing autonomously. For convenience
of exposition, let us consider four separate cases:
- si = rL and π ∈ [1/2, π0 ): the investor anticipates an uninformative

signal from the advisor by Lemma 1, so the utility she would obtain
by consulting an advisor is the same she would obtain investing by
herself. Given that π ∈ [1/2, π0 ) she would choose v ∗ > 0 even when
receiving si = rL . Therefore her utility in this case is UBadv = UBself =
1 (E[r̃|si =rL ,π ])2
2 γV ar[r̃|si =rL ,π ] .
In this case, for any small cost of advice the investor
prefers not to visit the intermediary.
- si = rL and π ∈ [π0 , 1]: the investor anticipates an informative sig-

nal from the advisor by Lemma 1. The utility she would obtain by
consulting an advisor is UBadv = (1 − π)U . This is because when
si = rL the investor’s expected probability that the true state is rH
is (1 − π) = P r(si = rL |rH ). Moreover, if the advisor’s signal is
σ ∗ (rH ) = rH the variance of her portfolio goes to zero. We put an (ar-
bitrarily large) bound to U to avoid enjoying then an infinite utility.
The utility she would obtain investing by herself is UBself = 0, because,
when π ∈ [π0 , 1], E[r̃ |si = rL ] = πrL + (1 − π)rH < 0 and she would
rather not invest in the risky asset. Since UBadv = (1 − π)U > 0 visiting
the advisor is strictly preferred by the investor.
- si = rH and π ∈ [1/2, π0 ): as before, by Lemma 1, the investor an-

ticipates an uninformative signal from the advisor: she chooses v ∗ > 0
∀si and her utility is UBadv = UBself = U (π, si = rH ). In this case,
for any small cost of advice > 0 the investor prefers not to visit the
intermediary.
- si = rH and π ∈ [π0 , 1): by Lemma 1, the investor anticipates an in-

formative signal from the advisor so that the utility she would obtain
by consulting an advisor is UBadv = πU . This is because when si = rH
the investor’s expected probability that the true state is rH is π =
P r(si = rH |rH ). Since the advisor is perfectly informed, the variance
of the portfolio goes to zero. The utility she would obtain by herself is
(E[r̃|si =rH ,π ])2
UBself = U (π, si = rH ) = 12 γV ar[r̃|si =rH ,π ] . Given that U is arbitrarily
large, we can safely assume that πU > U (π, si = rH ) ∀ π ∈ [π0 , 1],
64
and so visiting the advisor is preferred by the investor.
Derivation of utility functions in Section 3.3. For the case si = rH , the

expected value and variance of r̃ are:
E[r̃|π, si = rH ] = rH P r[rH |si = rH ] + rL P r[rL |si = rH ]

P r[rH ]P r[si = rH |rH ] P r[rL ]P r[si = rH |rL ]
= rH + rL
P r[si = rH ] P r[si = rH ]
1/2π 1/2(1 − π)
= rH + rL
1/2π + 1/2(1 − π) 1/2π + 1/2(1 − π)
= πrH + (1 − π)rL
and
X
V ar[r̃|π, si = rH ] = [ri − E(r̃|si = rH )]2 P r(ri |si = rH )
i
= [rH − E(r̃|si = rH )]2 P r(rH |si = rH )+
+ [rL − E(r̃|si = rH )]2 P r(rL |si = rH )
= π(1 − π)(rH − rL )2
The case si = rL is analogous. We therefore have
π∈[1/2,π0 ) 1 1
EUB = UB (π, si = rH ) + UB (π, si = rL ) − c(π, k)
2 2
[πrH + (1 − π)rL ]2 [πrL + (1 − π)rH ]2
+ − c(π, k)
4γπ(1 − π)(rH − rL )2 4γπ(1 − π)(rH − rL )2
Proof of Lemma 3 : let us first check conditions (i)-(iii):

2 +r 2 )
(rL π 3 +(1−π)3 ∂ 2 c(π,k)
(i) This is verified for H
2γ(rH −rL )2 π 3 (1−π)3
< ∂π 2
;
π∈[π0 ,1]
∂EUB
(ii) ∂π = − ∂c(π,k)
∂π < 0 whenever ∂c(π,k)
∂π > 0 as we assumed before;
2
(iii) condition ∂ ∂k∂π
c(π,k)
< 0 means that for increasing k the marginal cost of
effort is decreasing.
We can write EUB∗,adv − EUB∗,self by recalling from Section 3.2.2 that for
π ∈ [1/2, π0 ) the investor chooses to invest autonomously and for π ∈ [π0 , 1]
she will consult the advisor. We therefore compute the maximum value of
π∈[1/2,π0 )
the two ‘portions’ of the utility function by substituting π ∗ in EUB ,
π∈[π0 ,1]
and π0 in EUB . We then compute:
65
1
EUB∗,adv − EUB∗,self = U − c(π0 , k)+
2
n [π ∗ r + (1 − π ∗ )r ]2
H L
− +
4γπ ∗ (1 − π ∗ )(rH − rL )2
[π ∗ rL + (1 − π ∗ )rH ]2 ∗
o
+ − c(π , k)
4γπ ∗ (1 − π ∗ )(rH − rL )2
from which we can show that
∂[EUB∗,adv − EUB∗,self ] ∂c(π ∗ , k) ∂c(π0 , k)

= −
∂k ∂k ∂k
∂[c(π0 , k) − c(π ∗ , k)]
=− >0
∂k
∂c(π,k) ∂ 2 c(π,k)
for ∂π > 0, π0 > π ∗ , and ∂k∂π < 0.
66
Chapter 4
Financial literacy and the

demand for financial advice
4.1 Introduction
The growing research on financial literacy suggests that consumers’ knowl-
edge of basic financial principles and products is quite scarce, and that it
may not be sufficient to guarantee that households make sound financial de-
cisions. For instance, more financially illiterate households are more prone
to high-cost borrowing (Lusardi and Tufano, 2008), lack of planning and
saving for retirement (Lusardi and Mitchell, 2006, 2007a), portfolio under-
diversification (Guiso and Jappelli, 2008; Kimball and Shumway, 2007), and
so on.
However, one may argue that a low level of households’ financial literacy
does not necessarily imply that they will make poor financial decisions. In
principle, households could seek advice and guidance from qualified sources,
such as independent financial advisors, bankers, brokers, and other profes-
sionals. As long as households can resort to the advice of experts for their
financial decisions, the lack of financial literacy may look less worrisome, as
external advice could act as a substitute for learning by one’s self.
In practice, a number of factors may limit consumers’ willingness to
consult professionals and rely on their recommendations. Financial deci-
sions are not only difficult because of the skills and technical knowledge
required, but also because potential sources of information and advice may
not be completely fair and may not act in the consumers’ interest. For in-
stance, in markets for technically complex products, such as financial ones,
consumers often rely on the advice provided by representatives of the seller,
who perform the conflicting tasks of advising customers and selling financial
products (European Commission, 2009).
Conflicts of interest and misselling practices, i.e. selling a product that
may not match a customer’s needs, have been the focus of some theoretical
67
research. Conflicts of interest typically arise from the structure of advisor’s
incentives and from market imperfections (Bolton et al., 2007; Daniel et al.,
2002; Inderst and Ottaviani, 2009; Krausz and Paroush, 2002), and may af-
fect consumers’ demand for advice through different channels. For instance,
investor’s may be less willing to seek and follow advice if they are more
aware of advisors’ conflict of interest (Hackethal, Inderst, and Meyer, 2010),
or if they know they will receive more or less ‘informative’ advice according
to their own financial literacy (see results of chapter 3).
The previous literature on the use of external sources of advice suggests
that the use of ‘experts’ is not uniformly distributed in the population. Some
papers report evidence of the preferred sources of information and advice
among US and European consumers (Lusardi, 2003; Lusardi and Mitchell,
2006; EBRI, 2007; van Rooij et al., 2007). In general, they find that higher
financial literacy investors are more likely to use ‘formal’ sources of infor-
mation and advice (e.g., newspapers, internet and financial advisors), as op-
posed to ‘informal’ ones, such as friends, relatives, colleagues and neighbors.
This is consistent with the findings of Hackethal, Haliassos, and Jappelli
(2009), who devote part of their analysis to the demand for financial advice
and argue that advisors are consulted by those who need them relatively
less, since they are matched with wealthier and older investors, rather than
with poorer and inexperienced ones.
This paper contributes to the literature by investigating the role of finan-
cial literacy on the demand for financial advice. In particular, I will study
which investors seek advice, from whom, and to what extent they rely on
advice.
This is relevant for consumers, scholars and policy-makers. Consumers
are affected by (whether and) which advice they demand because invest-
ment performance and households’ wealth accumulation depend on who
ultimately takes portfolio management decisions. Moreover, the concerns
expressed by scholars and policy-makers about the lack of financial literacy
would look less worrying if individual gaps were compensated by external
advice coming from reliable and qualified sources.
The analysis explores empirically the choice among sources of financial
information and advice, and the extent to which customers rely on the advice
provided by their bank (or their financial advisor), using the 2007 Unicredit
Customers’ Survey (UCS). Even though not representative of the Italian
population as a whole, the survey is a representative sample of the cus-
tomers of one of the largest Italian banks and contains detailed information
on socio-demographic characteristics, wealth holdings, and portfolio com-
position. The 2007 survey also contains additional information on financial
literacy, trust and investment attitudes.
The rationale for concentrating on relations with intermediaries has to
do with the fact that they represent the main source of financial informa-
tion in Italy. Figure 4.1 reports evidence from a survey of Italian investors’
68
behavior (Beltratti, 2007), showing that banks are the main source of fi-
nancial information and advice, both with respect to professional sources of
advice and overall. The same is true in Figure 4.2 from the UCS, showing
that banks are the sources of advice visited most often. This preference for
intermediaries among professional sources of advice is in part explained by
the fact that the supply of independent financial advice (fee-based) is very
limited in Italy.
This paper improves upon the existing literature in several ways. Some
of the previous papers (Lusardi, 2003; Lusardi and Mitchell, 2006; EBRI,
2007; van Rooij et al., 2007) provide only descriptive evidence based on uni-
variate statistics, while I am able to investigate the issue in a multivariate
framework. Moreover, this paper extends the analysis beyond the choice of
preferred sources of advice, by focusing on the relationship between investors
and professional financial advisors and by studying how much individuals
rely on the advice of experts. In doing this, I extend the analysis of Hack-
ethal, Haliassos, and Jappelli (2009) by including other important factors,
such as financial literacy and trust, which are missing in their analysis (due
to the use of administrative data). Finally, the paper addresses potential
endogeneity issues regarding financial literacy and trust.
The results indicate that, even controlling for a number of important
factors such as trust towards one’s advisor, self-confidence in own financial
ability, wealth and opportunity cost of time, financial literacy is an impor-
tant factor in the demand for financial advice. First, the positive association
between financial literacy and the use of formal sources of advice previously
found in the literature is confirmed. Second, financial literacy increases the
probability of consulting the bank/financial advisor, while at the same time
it reduces that of delegating. In a context where the supply of independent
financial advice is extremely limited, this may be the wisest choice. These
findings confirm the theoretical results of chapter 3 that advisors are less
used by investors who need them the most. This implies that the presence
of qualified sources of advice may not be enough to counteract the effects of
the low level of financial literacy and that further policy measures may be
need to ensure sound financial decision-making.
The rest of the paper is organized as follows. Section 4.2 discusses the
previous literature, highlighting the potential determinants of the demand
for financial advice and the role of financial literacy. Section 4.3 presents
the dataset and the construction of the main variables used in the analysis.
Section 4.4 describes the empirical strategy for estimation, while section 4.5
presents the results for the use of financial advisors in comparison to informal
sources, and for the extent of reliance on on financial advisors. Section 4.7
concludes.
69
4.2 Background
4.2.1 Financial literacy and financial advice
Deciding how to allocate one’s savings in risky investments is not an easy
task for households and financial literacy is likely to have a role in this de-
cision. However, the literature studying specifically financial literacy has
explored the demand for financial advice only incidentally, even though the
ability “to know where to go for help” is recognized as an important ele-
ment for financial well-being (OECD, 2008; President’s Advisory Council on
Financial Literacy, 2008).1
As financially literate investors have a better understanding of financial
products and concepts, one might expect them to have an easier access to
financial markets, suggesting that they may have a lower need for finan-
cial advisors. Financial knowledge can be interpreted as a way to reduce
participation costs, since it has to do with “understanding basic investment
principles as well as acquiring enough information about risks and returns
to determine the household’s optimal mix between stocks and riskless as-
sets” (Vissing-Jorgensen, 2004, p. 179), which is typically identified as one
of the main costs to stock market participation.2 van Rooij et al. (2007)
show that financial literacy is related to higher stock market participation
among Dutch households. If financial literacy increases stock market partic-
ipation, then it may also increase the probability of investing autonomously
and having less of a need for external support.
However, much of the existing literature suggests the opposite, i.e. that
advice is demanded by knowledgeable investors and not by financially illit-
erate ones.
The theoretical predictions of chapter 3 are that more informed and
knowledgeable investors are more likely to receive ‘informative’ and valuable
advice from an intermediary/advisor and (in anticipation of this) they are
more likely to consult them and follow their advice with respect to less
informed and knowledgeable consumers.3
1
“Financial education is the process by which financial consumers/ investors improve
their understanding of financial products and concepts and, through information, instruc-
tion and/or objective advice, develop the skills and confidence to become more aware of
financial risks and opportunities, to make informed choices, to know where to go for help,
and to take other effective actions to improve their financial well-being (OECD, 2005,
2008)”.
2
Clearly, information barriers to stock market participation have to do also with cog-
nitive abilities (Christelis et al., 2010).
3
This is not in contradiction with the findings of Hackethal, Inderst, and Meyer (2010),
who argue that conditional on receiving advice from a professional advisor, more knowl-
edgeable investors are less likely to follow his recommendations, because they are able to
scrutinize his advice. From an empirical point of view they also show that investors re-
porting that they have a great interest in financial matters and that they keep themselves
informed are less likely to agree with the statement “with respect to financial issues, I
70
This is broadly consistent with the existing empirical evidence. Earlier
works provide some descriptive evidence about the demand for financial
advice. Lusardi (2003) shows that according to the 1995 Survey of Consumer
Finances financial planners/brokers are among the sources of information
used most often by 50-61 years-olders to make decisions about saving and
investments (together with relatives/ friends and magazines/ newspapers).
However, respondents in the 2007 Retirement Confidence Survey show some
reluctance in the use of formal sources of advice for retirement planning
(EBRI, 2007).
Further empirical (but mainly descriptive) evidence on financial literacy
suggests that it may affect the choice of financial advisors and information
sources (Bernheim, 1998). Lusardi and Mitchell (2006) show that individ-
uals who are correct about three financial literacy questions tend to use
formal tools for retirement planning (attend retirement seminar; use calcu-
lator/worksheet; consult a financial planner) rather than informal ones (talk
to family, friends, coworkers). At the same time, those who used more so-
phisticated tools were always more likely to get the literacy questions right,
as compared to those who relied on personal communications. Similar ev-
idence is found in the Netherlands, where those who display high levels
of basic and advanced financial literacy are less likely to rely on informal
sources of information (family, friends) and are more likely to rely on formal
sources (read newspapers, consult financial advisors, and seek information
on the internet) (van Rooij et al., 2007).4 Moreover, Hackethal, Haliassos,
and Jappelli (2009) show that advisors are matched with wealthier and older
investors, rather than with poorer and inexperienced ones, suggesting that
the demand for advice might be a complement rather than a substitute to
financial literacy.
Finally, the idea that advice is demanded by more knowledgeable in-
vestors is shared also by the psychological research. This literature points
to the fact that individuals who do not know much about (any) subject
tend not to recognize their ignorance, and so fail to seek better informa-
tion. Relatively less knowledgeable people are more likely to overestimate
their abilities, and as a consequence of their incompetence they also lack the
metacognitive ability to realize it (Kruger and Dunning, 1999). This effect
appears to be there also in the financial domain (Forbes and Kara, 2010).
constantly rely on the advice of my financial advisor”.
4
One may argue that also ‘formal’ sources may act misleadingly, and that not neces-
sarily resorting to them is a guarantee of sound financial decisions. For instance, investors
may follow unscrupulous financial ‘gurus’, or use unreliable internet advisory websites and
financial press. However, these sources are still more likely to provide valuable information
than non-professional sources, such as friends, neighbors and relatives. This can be the
case especially if individuals pair with similar people in terms of education and financial
literacy (i.e, if low financial literacy investors have low financial literacy friends), and if
investment knowledge is shared through social interaction with peers (Hong et al., 2004;
Duflo and Saez, 2002).
71
Overall, this evidence suggests that a further investigation of the effect of
financial literacy on the demand for advice – especially in the relation with
professional sources of advice, such as banks, brokers and financial advisors
– is needed.
4.2.2 Other determinants of the demand for financial advi-

sors
Even though self-assessed financial knowledge is often correlated with more
objective measures (Guiso and Jappelli, 2008; van Rooij et al., 2007), it
is likely to drive the demand for financial advice independently from the
latter. Georgarakos and Inderst (2010) study from a theoretical point of
view the effect of investors’ (perceived) financial capability on their decision
to participate to the stock market and whether to do so by relying on a
professional advisor or on their own judgment. As expected, when perceived
financial capability is higher the investor is more likely to hold risky assets
and to rely on her own knowledge instead of an advisor.
Moreover, it is important to disentangle self-assessed and test-based fi-
nancial literacy also because financial education initiatives aiming at im-
proving financial literacy may have the side-effect of raising self-confidence
without improving ability, leading to worse decisions (Willis, 2008).
Another potentially important factors is trust in advisors. As was ar-

gued before, there are reasons to believe that the market for financial advice
is imperfect. Not only advisors do not appear to correct investors’ behav-
ioral biases (Mullainathan et al., 2010; Shapira and Venezia, 2001), but it is
apparent that conflicts of interest may affect the supply of financial advice
(European Commission, 2009). As a matter of fact, cheating does happen in
financial markets. Data from the European Social Survey 2004 show that,
when asked how many times they had been cheated by a bank or insur-
ance company in the last 5 years, non-negligible shares of the population
reported of having experienced cheating more than once. Figure 4.3 shows
the distribution to this answer for some European countries.
In all the situations where investors may be afraid of being treated un-
fairly by their advisor or broker, trust becomes important for the investment
to take place. Gambetta (1998) defines trust as “the subjective probabil-
ity with which an agent assesses that another agent or group of agents will
perform a particular action (p. 217)”. Recent research has shown that
lack of trust in the financial system and financial intermediaries reduces the
probability of investing in the stock market. Guiso et al. (2008) show that
individuals who think that most people can be trusted are more likely to
buy stocks, and conditional on participation to the stock market they hold
more. Moreover, they show that personalized trust (i.e. trust in one’s own
bank or financial advisor) has a positive role in stockholding. Similarly,
72
Pasini and Georgarakos (2009) report evidence of a positive effect of trust
in financial institutions on stock market participation across countries. This
is because when the investor perceives a high probability of being cheated
she reduces her expected return from a financial investment, and if this is
not high enough she will be better off staying out of the stock market. Trust
in financial institutions appears to matter also for participation in 401(k)
plans. Agnew et al. (2007) find that (lack of) trust is related to the decision
to quit the plan in the presence of automatic enrollment.
Last but not least, wealth and the opportunity cost of time are also
important. Hackethal, Haliassos, and Jappelli (2009) study the investment
behaviour of the customers of a large German brokerage firm and investi-
gate the probability that investors have their accounts run by an independent
financial advisor. They show that advisors tend to be matched with wealth-
ier and older investors, who presumably delegate their investment decisions
(also) because of a high opportunity cost of time.
4.3 Data and descriptives

The Unicredit Customers’ Survey is a representative sample of the customers
of one of the largest Italian banks (Unicredit group). Eligible interviewees
are account holders with at least 10,000 euro in the bank at the end of 2006.
The 2007 UCS survey samples 1,686 individuals. Even though sample se-
lection is based on individual Unicredit customers, the survey has detailed
information on demographic characteristics of all components of account
holders’ households, including their labour market position, income, and
household wealth (financial wealth, real assets, insurance policies and pen-
sions).5 Additionally, the account holder is asked about her relations with
the bank, her attitudes towards investments, and her level of financial lit-
eracy. The only information available based on the bank’s administrative
records is related to financial wealth holdings, while other (potential) pieces
of administrative information – for instance about portfolio allocation, risk
profile, advisors fixed effects, etc. – are not available.
Table 4.1 describes the construction of the main UCS variables used in
the analysis, and contains description and data sources for the variables not
contained in the Unicredit dataset.
5
Analyzing respondents who are customers of the same bank has advantages and short-
coming. One drawback is that the choice of the bank is certainly not random and it might
be driven by the same factors that affect the extent of reliance on the bank as a source
of advice. This selection, however, cannot be controlled for. Moreover, cross-bank het-
erogeneity cannot be used to explore, for instance, cost effects. On the positive side,
analyzing customers of the same bank reduces unobserved heterogeneity (for instance in
terms the cost and type of advice provided, etc.).
73
Summary statistics for the variables used in the analysis are reported in
Table 4.2. Bank customers are on average 55 years of age and about one
third are females; 32% are employees, 28% are self-employed and 33% are
retired; they earn an average (total) individual income of 50,000 euro per
year and 45% of the sample has been a customer of Unicredit for at least 20
years.
In addition, Table 4.3 shows a comparison between the UCS and the
Bank of Italy’s Survey on Household Income and Wealth (SHIW), which
is a nationally representative sample. To improve comparability, I selected
three sub-samples from the SHIW: the sample of household heads (because
in the SHIW financial literacy tests are asked only to household heads), the
sample of those who hold an account at a bank or at a post office (because the
UCS only samples account holders), and finally the sub-sample of household
heads who hold a bank/post account. In general, the Unicredit sample is
older, more educated, more likely to live in the North, and with higher family
income. Given that financial literacy is correlated with education, income
and is usually higher in northern regions, it is reasonable to expect the UCS
sample to display higher financial literacy than the SHIW one. However,
it is hard to make financial literacy comparisons. First, it is not possible
to compare single items since tests are different.6 Second, it is not easy to
make comparisons even by looking at the overall performance. On average
UCS respondents report more correct answers, display a considerably lower
number of “do not know”s and a lower fraction of individuals gave zero
correct answers. Nevertheless, in the UCS there is a higher share of incorrect
answers than in the SHIW.
Let us now describe in more detail the main variables used in the analysis.
The dependent variables refer to the use of various sources of advice, and of
professional advisors in particular. Descriptives about the use of different
sources are reported in Table 4.4. Banks and brokers (promotori finanziari )
are those visited most often, while friends/ relatives/ colleagues and internet
are rarely used.7 As for the extent of reliance on advice from a professional
about financial investments decisions, respondents’ choice between investing
autonomously or delegating is reported in Table 4.5. About 12% of the
respondents with risky assets decide completely by themselves, 68% ask for
their banks’s / advisors’ advice before forming their own decisions, while
almost 20% rely mostly or completely on advisors’ indications.
Other variables of interest are financial literacy and trust. The financial
6
The questions about inflation is similar, even though with a slightly different wording.
On this questions the share of correct answers is much higher in the nationally represen-
tative SHIW sample than in the Unicredit one.
7
In Italy trade unions too can be considered as a source of financial advice, especially
in relation to occupational pension funds. However, I will not consider their role in the
present study, both because the focus here is not on retirement savings and, above all,
because no information about workers’ relations with trade unions is present in the data.
74
literacy measure is constructed as in Guiso and Jappelli (2008) and equals
the number of correct answers to eight questions on interest, inflation, un-
derstanding risk diversification and understanding the riskiness of various
financial products. The wording of the tests is reported in Table 4.1 and
the answers are displayed in Table 4.6. The average index corresponds to
4.7 correct questions out of 8 and less than 1% of the sample can answer all
of them correctly; the overall distribution of correct answers is displayed in
Figure 4.4.
The measure of personalized trust is based on how much trust the respon-
dent has in his advisor concerning his financial investments. The average
answer is 3.8 on a scale from 1 to 5, where higher values indicate higher
trust.
4.4 Empirical strategy

To assess the impact of financial literacy on the demand for financial advice,
I conduct two sets of analyses. In the first one, I analyze in a multivariate
model investors’ use of different sources of financial information and advice
and their preferences for professional sources over informal ones, such as
friends, relatives and colleagues. This allows to verify whether the positive
relation between financial literacy and use of formal sources, shown in the
US (Lusardi and Mitchell, 2006) and the Netherlands (van Rooij et al.,
2007), holds also in the Italian data. In the second part, I concentrate
on the relation between investors and professional financial advisors, and
I analyze the extent of reliance on financial advisors. As about 6% of the
sample reports that Unicredit is not their main bank, these observations are
dropped from the analysis, and only observations were Unicredit is the main
or only bank are used.
Descriptives about the use of various sources of advice are reported in
Table 4.4. Banks and brokers are those visited most often, while friends/
relatives/ colleagues and internet are seldom used.
The empirical specification used to assess the preference among different
sources of advice is the following probit model with selection
Pjk = 1[X1 β1 + u1 > 0]

S = 1[Xδ2 + v2 > 0]
where Pjk is a dummy taking value one when source j is used very often
or when source j is preferred to source k, depending on specifications. I
define a source j to be preferred to source k when source j is used more of-
ten than source k. Informal sources include family, friends, and colleagues.
Explanatory variables in X1 include gender, age, years of education, occupa-
75
tional status, (macro) regions of residence, log individual income, financial
wealth categories,8 experience, whether the respondent works in the finan-
cial sector, length of bank relationship, financial literacy, self-confidence and
trust, and X includes X1 plus some variables serving as exclusion restric-
tions. (u1 , v2 ) is assumed to be distributed as a bivariate normal. Source
use/preference is observed only when investors hold risky assets and devote
a positive amount of time to becoming informed about financial issues (this
defines the sample selection, i.e. S = 1). The exclusion restrictions used are
risk preferences and zero saving rate, because they affect the propensity to
hold risky assets while they are not related to the frequency of use of any
source of advice. It is more difficult to find credible exclusion restrictions
affecting the propensity to spend at least some time to gather financial infor-
mation. The selection turns out to be not significant (i.e., not statistically
different from random) in most specifications.
In the second part of the analysis I analyze the effect of financial literacy
on the extent of investors reliance on their financial advisor. Descriptive
statistics about the choice between investing autonomously or delegating
are reported in Table 4.5.
Table 4.7 reports the financial literacy distribution across modes of in-
vestment, showing that investors choosing an intermediate level of delega-
tion (i.e., those who ask for the bank/advisor’s opinion before investing)
have higher financial literacy than those on the two extremes (i.e., those
either investing by themselves, or fully delegating). To see whether this is
confirmed in a more thorough analysis, I estimate an ordinal response model
of the probability of choosing one of the five possible values.
Since the question about the extent of reliance on financial advice is
asked only to a sub-sample of the survey (i.e., those who hold risky assets),
the relation is first estimated by ordered probit controlling for the selection
bias, and using the same exclusion restrictions as before (i.e., risk preferences
and zero saving rate). As the selection is not significant,9 I proceed with
the econometric analysis disregarding the selection issue.
8
Financial wealth (dummies) are based on the bank’s administrative records (indicat-
ing the amount of financial wealth held by the customer at the end of the year 2006)
and are ‘augmented’ with self-reported financial wealth when the self-report exceeds the
administrative information. This is to allow for the possibility that respondents hold
additional financial assets outside their Unicredit account. Basing this variable on ad-
ministrative data corrects the heavy item non-response and under-reporting of the ‘sub-
jective’ financial wealth measure, where about 54% of the sample refuses to indicate in
which range their wealth is included and the remaining respondents who provide an an-
swer often under-report their holdings (i.e., indicate a lower bracket with respect to the
administrative data).
9
Results for the estimation by ordered probit controlling for the selection bias are in
Table 4.9. Future research will be devoted at estimating the same generalized ordered
probit regression controlling for the selectivity bias.
76
I then estimate the following generalized ordered probit model of chosen
delegation level10
P (Di = 1) = F (−Xβ1 )
P (Di = j) = F (κj − Xβj ) − F (κj−1 − Xβj−1 ), j = 2, ..., J − 1 (4.1)
P (Di = J) = 1 − F (κJ − XβJ )
where J = 5, F (·) is the cumulative normal distribution, X is the vector

of independent variables (which includes gender, age, years of education,
occupational status, (macro) regions of residence, log individual income,
financial wealth, experience, whether the respondent works in the financial
sector, length of bank relationship, financial literacy, self-confidence and
trust), and Di is the delegation level chosen by individual i, where:
Di = 1 : investor i decides completely by herself, the bank simply executes

her decisions
Di = 2 : investor i tells the bank/advisor how she intends to invest and asks
their opinion before deciding
Di = 3 : investor i considers bank/advisor’s proposals before deciding
Di = 4 : investor i relies mainly on bank/advisor for her investment decision
Di = 5 : investor i lets the bank/advisor decide everything
In the generalized ordered probit model, the parameters βj are allowed

to vary across alternatives by generalizing the threshold parameters and
making them dependent on covariates
κj = κ̃j + Xγj
Hence, the parameters βj in (4.1) are defined as βj = β − γj . In practice,
equality of coefficients β1 = ... = βJ is not imposed when statistical tests re-
ject the null of equality at the 5% level, implying that for these variables the
parallel-lines assumption is violated; otherwise equality is imposed. In the
present case, the parallel-lines assumption is violated for financial literacy
and trust in advisors.
4.5 Results
4.5.1 Use of advisors and other sources
A common results found in the previous literature is that high financial
literacy is usually associated with a preference for formal sources of infor-
mation and advice rather than for informal ones (Bernheim, 1998; Lusardi
10
See Greene and Hensher (2010); Boes and Winkelmann (2006); Terza (1985).
77
and Mitchell, 2006; van Rooij et al., 2007). However, so far these results
have been reported in univariate analyses.
Table 4.8 reports the marginal effects of financial literacy on the proba-
bility of using the bank often or very often as source of advice (Column I);
on the probability of using the bank or a broker often or very often (Col-
umn II); on the probability of using informal sources often or very often
(Column III); on the probability of using the bank more often than informal
sources (Column IV); on the probability of using the bank or a broker more
often than informal sources (Column V). The results in the fourth and fifth
columns show that financial literacy increases the probability of preferring
professional advisors to informal sources (i.e., friends/relatives/colleagues)
by about 4-5 percentage points. As the first three columns show, however,
this effect is determined by a tendency of more literate customers to avoid
informal sources, rather than preferring formal ones. It appears that finan-
cial literacy is not associated with the use of professional financial advisors,
while it is related with a more infrequent use of friends/family/colleagues.
4.5.2 How much to rely on advisors

This section investigates the effect of financial literacy on the extent of
reliance on advice from a professional financial advisor.
Table 4.10 reports the marginal effects from a generalized ordered probit
regression on the probability of choosing one the five options about au-
tonomous investment/delegation. The most interesting result is that the
effect of financial literacy is non-monotonic across delegation levels, thus
confirming the descriptive evidence found in Table 4.7.11 Higher financial
literacy reduces the probability of choosing to invest autonomously and it
also reduces the probability of delegating financial decisions mostly or com-
pletely to the advisor. On the contrary, financial literacy increases the prob-
ability of choosing the intermediate option, i.e. consulting the advisor, while
at the same time maintaining the final decision over investments. This is
consistent with the general finding that financial literacy is associated with a
tendency to consult professionals, and lends support to the results of Hack-
ethal, Haliassos, and Jappelli (2009) showing that advice is demanded by
older and wealthier investors, rather than by poorer and inexperienced ones.
The fact that more knowledgeable investors are more likely to consult an
advisor but less likely to delegate is also consistent with the finding of Hack-
ethal, Inderst, and Meyer (2010) that investors more interested in financial
matters (and presumably more knowledgeable) are less likely to follow ad-
visor’s recommendations, conditional on receiving advice.
Other interesting results emerge from Table 4.10. More educated in-
vestors and those working in the financial sector are less likely to delegate
11
The same result about financial literacy, also quantitatively, is found estimating a
non-ordinal model, such as a multinomial logistic regression (not reported here).
78
and more likely to invest by themselves. The same is true for investors who
have higher perception of their own financial knowledge. This supports the
theoretical predictions of Georgarakos and Inderst (2010), who argue that
investors with higher perceived financial capability should be more likely not
only to hold risky assets, but also to invest relying on their own judgment
instead of an advisor.
The fact that women are more likely to delegate is not easy to interpret.
It may be seen as an indirect effect of self-confidence: as women are typically
found to be less overconfident than men (Barber and Odean, 2001), they
might be less prone to invest by themselves. Other explanations, however,
may be equally valid (e.g., they are less used than men to manage house-
hold’s finances). As expected, trust towards one’s own advisor increases the
likelihood of delegation and reduces that of autonomous investment. On the
other hand, the length of the relationship with the bank does not have a
clear effect on the delegation choice.
Some variables that might be considered to proxy for investors’ opportu-
nity cost of time – such as their occupational status, or their individual in-
come – do not affect the probability of delegating or investing autonomously.
This is in contrast with the previous findings of Hackethal, Haliassos, and
Jappelli (2009), maybe because the Unicredit sample is richer than the na-
tional average. This may reduce the heterogeneity across the variables that
are related to the opportunity cost. Finally, financial wealth appears to
be related to a tendency to delegate (even if not all wealth categories are
significant), consistently with Hackethal, Haliassos, and Jappelli (2009).
4.6 Robustness checks

4.6.1 Financial literacy indices
As discussed in section 4.3, the financial literacy index is constructed as
in Guiso and Jappelli (2008). This equals the number of correct answers
to four questions about interest, inflation and risk diversification, plus four
questions based on understanding the riskiness of various financial products.
This index may be problematic not only because it involves some degree of
arbitrariness, but also because it may be overly dependent on some specific
question(s).
In this section I estimate again model (4.1) with alternative financial
literacy indices, showing that results remain qualitatively the same. For
ease of exposition let us define the following variables, corresponding to the
single ‘items’ constituting the indices (detailed wording is in Table 4.1):
- Inflation: correct on quiz about inflation

- Interest: correct on quiz about interest
79
- Diversif1 : correct on first quiz about risk diversification (definition of
diversification)
- Diversif2 : correct on second quiz about risk diversification (choose
better diversified portfolio)
- Risk1 : correct on first quiz about risk (Private bonds are at least as
risky as deposits)
- Risk2 : correct on second quiz about risk (Stocks at least are as risky
as government bonds)
- Risk3 : correct on third quiz about risk (Stocks mutual funds are at
least as risky as bonds mutual funds)
- Risk4 : correct on fourth quiz about risk (Housing is at least as risky
as deposits)
The following indices will be employed (all of them are re-scaled so as to

range between 0 an 10):
- Financial literacy 1. It is the same the main index (Guiso and Jappelli,
2008), rescaled: 10×(Inf lation+Interest+Diversif 1+Diversif 2+
Risk1 + Risk2 + Risk3 + Risk4)/8
- Financial literacy 2. Since quizzes Risk1 − Risk4 are highly corre-

lated among themselves, this index gives them a lower weight: 10 ×
[Inf lation + Interest + Diversif 1 + Diversif 2 + (Risk1 + Risk2 +
Risk3 + Risk4)/4]/5
- Financial literacy 3. It is the same as the previous one with the dif-
ference that the inflation question is eliminated, because it shows a
very low correct response rate (34%) – much lower than a similar
question in the SHIW (60%) – which might be related to a misinter-
pretation of the question rather than to financial illiteracy. The index
is: 10×[Interest+Diversif 1+Diversif 2+(Risk1+Risk2+Risk3+
Risk4)/4]/4
- Financial literacy 4: 10 × [Interest + Diversif 1 + Diversif 2]/3
Table 4.11 reports estimation results, showing that the effect of financial
literacy is qualitatively the same across indices 1 to 3, while results for
‘Financial literacy 4’ are insignificant on almost all values of the dependent
variable.
4.6.2 Financial literacy endogeneity

The fact that financial literacy is associated with the preference for formal
sources of advice and with the tendency to consult rather than delegate
to professional advisors does not necessarily provide indications on the di-
rection of causality. Financial literacy may be positively correlated with a
80
preference for advisors because individuals learn from formal sources, rather
than because financially literate individuals choose formal sources of advice.
Similarly, investors who consult professional advisors are more likely to learn
from them than those who delegate or invest by themselves.
To address this issue, I concentrate on potential learning from the bank
and I consider various sub-samples of respondents who should be more likely
to learn from the bank (i.e. those who use the bank often or prefer the bank
to friends, and those who report Di = 3). Then I check whether financial
literacy increases with the length of bank relationship, under the assumption
that if there is learning from the bank, it should be related to the length of
relationship. Table 4.12 shows that financial literacy is not related to being
a long-time customer of Unicredit in any of the sub-samples considered.
As it is arguable that financial literacy may still be endogenous in spite
of this evidence, the same relation of model (4.1) is estimated controlling for
endogeneity via the control function approach (Rivers and Vuong, 1988).12
The instruments for financial literacy are the average financial literacy at
regional level (taken from the Bank of Italy’s Survey on Household Income
and Wealth, SHIW) and experience with financial products (from UCS).
Financial literacy at regional level is likely to increase individual knowledge
through social interaction. The measure of previous experience is based on
a question asking at what age the individual first traded a given financial
product (either government bonds, stocks or mutual funds). This is strongly
related to financial literacy, while it is not related to the extent of delega-
tion (controlling for age and length of bank relationship, see Table 4.10).
Estimates from a first stage regression are reported in Table 4.13, together
with statistics about instruments validity. Both experience and regional fi-
nancial literacy positively and significantly affect the financial knowledge of
Unicredit customers, and taken together produce an F statistic of over 18,
indicating that the instruments have sufficient explanatory power. More-
over, the Hansen’s J test does not reject the null of instruments validity
(p-value 0.169).
Results from Table 4.14 show that the positive relation between financial
literacy and the propensity to consult an advisor is robust to controlling for
endogeneity and is even stronger than in Table 4.10. The effect of financial
literacy on investing autonomously and on delegating turns insignificant,
even though it carries the same (negative) sign as before.
12
When estimating a probit model with a continuous endogenous variable, the two-step
approach due to Rivers and Vuong (1988) consists in saving the residuals from the first
stage regression and then plugging them into the structural probit equation. This proce-
dure can be easily extended to ordered probit response models (Wooldridge, 2007), and can
analogously be extended to a generalized ordered probit model, since the generalization
does not affect the error term of the discrete choice equation.
81
4.6.3 Relations with banks and brokers
As was previously mentioned, the estimation sample includes only observa-
tions where Unicredit is the main or only bank (excluding about 6% of the
total sample). A further check uses alternative sample selections, showing
that results are robust to a more stringent selection of the sample. Table
4.15 reports estimates of model (4.1) based on the following sub-samples:
- Unicredit is the main or only bank (i.e., the baseline), with N = 1,116
- Unicredit is the only bank, with N = 802
- Unicredit is the main or only bank and the respondents uses brokers
for advice never, seldom or sometimes, with N = 847
- Unicredit is the main or only bank and the respondent never or seldom
uses brokers for advice, with N = 705
Estimates from Table 4.15 show that results in all rows are quantitatively
very similar, even though in the third and fourth rows the effect of literacy
on investing autonomously becomes insignificant (potentially also because
of a reduction in sample size).
4.6.4 Trust endogeneity

Trust towards financial advisors can be endogenous with respect to the
choice of delegating if an investor increases her trust because she delegated
in the past and was satisfied with the advice received, or if respondents try
to rationalize ex-post their delegation behavior when answering to the trust
question.
To verify the robustness of the results of Table 4.10 with respect to the
potential endogeneity of trust, its effect on delegation is estimated using
instrumental variables. Table 4.16 provides evidence about potential candi-
dates to be used as instrumental variables.13
13
Table 4.16 provides evidence about instruments, based on previous literature. First,
Column I reports the effect of generalized trust expressed by UCS respondents, showing
that generalized and specific trust are positively correlated. Then, Column II reports the
effect of trust in banks at the regional level, which is positively related to trust in advisors
in the UCS.
Further instruments are sought in the social capital literature. Guiso et al. (2004) argue
that participation to referenda is related to social capital and trust. Column III shows that
the turnout (at provincial level) at the 2006 referendum significantly affects trust towards
advisors. Other attempts to include among the instruments other variables drawn from
the social capital literature were not successful. These variables included blood donations
at the provincial level (Guiso et al., 2004), income inequality at regional level (Zak and
Knack, 2001; Knack and Keefer, 1997), and the regional participation rate to associations
(Putnam, 1993). Finally, since previous research showed the existence of a link between
cross-country generalized trust and economic growth, the GDP growth rate at the province
82
Table 4.17 reports the estimates from the first stage regression (Column
I) and from various second stages regressions: a probit model for delega-
tion (with control function, Column II), a linear probability model for a
dichotomous indicator of delegation (estimated by GMM, Column III), and
a linear model for for the continuous indicator of delegation (estimated by
GMM, Column IV). Trust towards advisors is instrumented with average
trust towards banks at the regional level and turnout at the 2006 referen-
dum at the provincial level (controlling for provincial GDP growth), which
should not have any relation with financial delegation.14 Even if referendum
turnout significantly affects trust towards advisors, the F test on excluded
instruments reported at the bottom of the table is very low, suggesting a
weak instrument problem. The Hansen’s J test supports the null hypothesis
of instruments validity. Unfortunately, once trust is instrumented its effect
on delegation becomes insignificant, probably due to instruments weakness.
This does not change when the second stage follows a binary response model
or a linear one (and when the dependent variable is the probability of dele-
gating mostly or completely, Di ≥ 4, and the extent of delegation, Di ). For
most of the other covariates the sign and significance remain the same as
without instrumenting.
To partially overcome the problem of instruments weakness, I estimate
separate regressions for newer and older customers, based on the idea that
newer clients have had less time to update their trust priors.15 Table 4.18
reports the marginal effects on the probability of delegation (Di ≥ 4) from
two generalized ordered probit regressions run on the two sub-samples of
relatively more recent (at most five years) and relatively older customers of
the bank (more than five years). As Table 4.18 shows, trust is an important
factor in explaining delegation also for customers who have had less time to
learn about their bank trustworthiness (the effect is almost the same for the
two groups). This suggests that the endogeneity of trust should not be too
serious a problem.
level is added as a control (Dincer and Uslaner, 2010; Knack and Keefer, 1997; Zak and
Knack, 2001).
14
As one may argue, in Italy the decision to participate or not to a referendum has a
strategic component, since the referendum is valid only if at least the majority of electors
goes to the polling station. However, the 2006 one was a ‘constitutional referendum’, which
does not require a minimum turnout to be valid. Moreover, the analysis was repeated using
the provincial participation rates to political elections – in particular, participation to the
2006 elections for the Senate – as an alternative to referendum participation (not reported).
Results are almost the same, as the two participation rates are highly correlated.
15
Clearly, it would make more sense to restrict this sub-sample to much more recent
customers (e.g. less than one year), because five years might be a long enough span to
revise one’s priors. However, the number of such respondents is too low (< 20) to allow
this estimation.
83
4.6.5 Effect of trust across financial literacy levels
Finally, it is interesting to note whether (and how) financial literacy and
trust interact in affecting the demand for advisors. Guiso et al. (2004, 2008)
find that the effect of trust on financial development (use of checks, percent
of portfolio non in cash, etc.) and on stock market participation is higher
for respondents with education below the median.
It is quite natural to expect trust to have a different impact across finan-
cial knowledge also on the use and reliance on advisors. Indeed Georgarakos
and Inderst (2010) argue that trust in advice should affect the decision
to participate in risky assets (through the use of an advisor) only when
investor’s perceived own capability is low, and this is consistent with their
empirical findings, where trust increases participation only for investors with
less than college education.
In this case, however, as Table 4.19 shows, the effect of trust is almost
the same across the two sub-samples of investors with above average and
below average financial literacy, and analogous results are obtained splitting
the sample by education level (not reported).

I investigate the role of financial literacy on the demand for financial ad-
vice, looking at both the use of financial advisors in comparison to informal
sources, and at the extent of reliance on financial advisors for portfolio
management. Given the lack of nationally representative datasets about
this issues, the empirical analysis exploits the 2007 Unicredit Customer’s
Survey, which is representative of the customers of one of the largest Italian
commercial banks.
The results indicate that, controlling for a number of factors includ-
ing trust towards one’s own advisor, self-confidence in own financial abil-
ity, wealth and opportunity cost of time, financial literacy is important in
explaining the demand for financial advice, and the relationship between
private investors and financial intermediaries providing advice. First, the
positive association between financial literacy and a preference for finan-
cial advisors over informal sources previously found in the literature is con-
firmed. Second, financial literacy increases the probability of consulting the
bank/financial advisor, as opposed to investing without consulting any pro-
fessional or delegating. In a context where the supply of independent (fee-
based) financial advice is extremely limited, consulting one’s bank without
delegating may be the wisest choice. These findings suggest that advisors
are used less often by investors who need them the most. This implies that
the presence of qualified sources of advice may not be enough to counter-
act the effects of the low level of financial literacy, and that further policy
measures may be need to ensure sound financial decision-making.
84
Appendix: Tables and figures
Main source of financial information

100
80
60
%
40
20
0
2001 2002 2003 2004 2005 2006 2007

Bank Broker Friends/family
Newspapers Internet TV
Other None DK/refuse
Source: BNL/Centro Einaudi 2007
Figure 4.1: Main source of financial information
Bank Broker Friends/Relatives

60
40
20
Percent
0
TV/Radio Press Internet

60
40
20
0
Never Very often Never Very often Never Very often

Frequency of use of various sources of info/advice (Source: UCS 2007)
Figure 4.2: Frequency of use of sources of information/advice
85
Germany Spain France
80
60
40
20
Percent
0
UK Italy Netherlands
80
60
40
20
0
Never 1 2 3-4 5+ Never 1 2 3-4 5+ Never 1 2 3-4 5+

Times cheating by bank/insurance company, last 5 yrs
Source: ESS 2004
Figure 4.3: Frequency of cheating by bank/insurance company

30
20
Percent
10
0
0 2 4 6 8
Financial literacy (Number correct)
Figure 4.4: Financial literacy distribution (baseline definition)
86
Table 4.1: Variable Description and Data Sources
Variable Description Source
Financial Liter- The financial literacy measure is constructed as in Guiso and Jappelli UCS
acy (2008). One point is given if the respondent can answer correctly to
each of the following questions:
- Inflation: Imagine an account yields 2% yearly (net of costs

and taxes). With inflation at 2% per year, how much do you
think you will be able to buy after two years (without moving
funds in the account)? More than what I could buy today |
Less | The same | Do not know;
- Interest: Imagine you know with certainty that in six months

interest rates will rise. Do you think you should buy fixed rate
bonds today? Yes | No | Do not know
- Diversif1 : What do you think having correctly diversified in-

vestments means? Having in one’s own portfolio both bonds
and stocks | Do not invest for too long in the same finan-
cial product | Invest in as many assets as possible | Invest
in several assets at the same time, in order to limit exposure
to risks linked to single assets | Do not invest in very risky
products | Do not know
- Diversif2 : Which of these portfolios is better diversified?

70% T-bills, 15% European equity fund, 15% in 2-3 Italian
stocks | 70% T-bills, 30% European equity fund | 70% T-
bills, 30% in 2-3 Italian stocks | 70% T-bills, 30% in stocks
of companies I know well | Do not know
Four other indicators are based on the question “How risky do you
think these products are?” The answers can be from 1 (Not risky at
all) to 5 (Very risky) and ‘Do not know’ is always an option. One
point is given if the respondent can correctly state that
- Risk1 : Private bonds are at least as risky as deposits
- Risk2 : Stocks at least are as risky as government bonds
- Risk3 : Stocks mutual funds are at least as risky as bonds

mutual funds
- Risk4 : Housing is at least as risky as deposits
Self-confidence It is based on the question: “For each of these ten assets I would like UCS
(Self-assessed you to tell me how much you think you know it”, where the answer
financial knowl- can be in the range 1 (I do not know it at all) to 5 (I know it very
edge) well). The assets are: government bonds, repurchase agreements,
private bonds, mutual funds, derivatives, unit-linked or index-linked
life insurance, ETFs, managed portfolios, structured products. The
self-confidence index used in the analysis is the average of these ten
measures, and ranges from 1 to 5.
Continues
87
Table 4.1: (continued)
Variable Description Source
Experience Three questions are used in measuring experience in assets trading. UCS
If the respondent has ever invested in either bonds, stocks or mutual
funds, then the UCS asks at which age the respondent first invested
in each of bonds, stocks and mutual funds. Experience in each asset
is computed as the difference between current age and age of first
investment. Overall experience is computed as the maximum of these
three numbers. If the respondent has never invested in any of the
three assets, experience is set to zero.
Finance sector A dummy variable taking value of one if the respondent works in UCS
the sector related to “monetary and financial intermediation, and
insurances”
Financial wealth Given the categorical variable f patrim based on administrative data UCS
categories and indicating in which class the financial holdings (at the bank) of
each respondent fall, and given the categorical variable self w indicat-
ing the self reported category in which the (total) financial holdings
of each respondent fall, I build a categorical variable f inw that is

f patrim if self w ≤ f patrim
f inw =
self w if self w > f patrim
Since about 54% of the observations in self w are missing, it is likely

that f inw is still under-reported with respect to the true financial
wealth.
Zero saving rate It is captured by a question asking “On average, in the year 2006 UCS
which percentage of your income did you save? More then 50% of
your annual income | 30-50% | 20-30% | 10-20% | 5-10% | 1-5% |
0%, I did not save anything”. The variable used in the analysis is a
dummy variable taking the value of one if the answer is “0%, I did
not save anything”
Risk preferences It is based on the question “In managing your financial investments UCS
which of these attitudes do you usually have? When I invest I usually
look for: Very high returns, even with a high risk of losing part of
your principal | High returns with a fair degree of principal safety |
Fair returns with high safety of your principal | Low returns without
risk of losing your principal”
Trust towards It is based on the question “Overall, how much trust do you have UCS
own financial in your bank advisor or financial advisor concerning your financial
advisors investments?” with the answers ranging from 1 (No trust at all) to
5 (I trust a lot).
Generalized It is a dummy based on the World Values Survey question “Generally UCS
trust speaking, do you think that most people can be trusted or that you
have to be very careful in dealing with people?”. The dummy takes
the value of 1 if the respondent answers “I think that most people
can be trusted”
Trust in banks This variable is based on the Fondazione Rodolfo Debenedetti’s ‘TFR FRDB
Survey’. This is an ad hoc survey of private sector employees con- TFR Sur-
ducted in 2007 to investigate the effects of a pension reform. The vey
survey asks “Do you trust banks? Fully | A lot | Little | Not at all”.
The variable is the share of respondents answering ‘Fully’ within each
region, weighted with the weights provided with the survey
GDP growth GDP growth rate in 2006 at provincial level Eurostat
Referendum Voter turnout at the provincial level for the 2006 constitutional ref- Ministry of
2006 erendum Interior
88
Table 4.2: Summary statistics
Mean Median Std. Dev. Min Max
Female 0.30 0 0.46 0 1

Age 54.81 57 12.27 25 89
Years schooling 12.47 13 4.04 0 20
Employee 0.32 0 0.47 0 1
Self-employed 0.28 0 0.45 0 1
Unemployed 0.01 0 0.07 0 1
Retired 0.33 0 0.47 0 1
Other out of the labor force 0.07 0 0.25 0 1
Total individual income (th.) 50.72 31 67.85 0.2 822
Fin Wealth 10 − 50, 000 euro 0.15 0 0.36 0 1
Fin Wealth 50 − 100, 000 euro 0.22 0 0.41 0 1
Fin Wealth 100 − 150, 000 euro 0.19 0 0.39 0 1
Fin Wealth 150 − 250, 000 euro 0.18 0 0.38 0 1
Fin Wealth 250 − 500, 000 euro 0.19 0 0.39 0 1
Fin Wealth 500, 000+ euro 0.07 0 0.25 0 1
Experience 13.37 12 12.82 0 53
Years at Unicredit: < 1 0.01 0 0.11 0 1
Years at Unicredit: 1 − 5 0.10 0 0.31 0 1
Years at Unicredit: 20+ 0.45 0 0.50 0 1
Trust towards advisor 3.78 4 0.91 1 5
Financial literacy 4.68 5 1.48 0 8
Self-assessed fin knowledge 2.90 2.9 0.85 1 5
Very risk tolerant 0.02 0 0.13 0 1
Risk tolerant 0.28 0 0.45 0 1
Risk averse 0.52 1 0.50 0 1
Very risk averse 0.19 0 0.39 0 1
Saving: > 50% 0.03 0 0.17 0 1
Saving: 30 − 50% 0.09 0 0.28 0 1
Saving: 20 − 30% 0.16 0 0.37 0 1
Saving: 10 − 20% 0.20 0 0.40 0 1
Saving: 5 − 10% 0.17 0 0.38 0 1
Saving: 1 − 5% 0.13 0 0.34 0 1
Saving: 0% 0.22 0 0.42 0 1
Data: Unicredit 2007. N = 1,686
89
Table 4.3: Comparison between UCS and SHIW datasets
UCS 2007 SHIW 2006

Household Account Household
Account head holder head and
holder (answering at bank or account
FL tests) post office holder
Male 69.9 62.8 49.1 65.0
Age: ≤ 30 2.5 3.4 29.7 3.3

31 − 40 12.9 13.8 13.0 14.3
41 − 50 21.6 19.8 15.4 20.4
51 − 65 38.3 28.4 22.0 29.4
66+ 24.6 34.6 20.0 32.6
No education 0.4 5.7 11.0 4.0

Primary 8.7 25.8 20.0 23.7
Secondary 20.9 27.9 28.9 28.2
High school 43.7 31.8 31.1 34.3
University degree or more 26.4 8.8 9.0 9.8
North-west 22.8 25.9 25.5 28.2

North-east 28.5 22.0 22.8 23.5
Center 24.3 19.7 21.0 20.5
South 16.9 20.9 19.9 17.7
Isles 7.5 11.6 10.9 10.1
Household income (avg.) 71,324.6 31,659.5 37,850.9 33,653.1

< 20, 000 7.4 32.5 19.9 27.2
20 − 50, 000 44.5 53.3 60.0 57.1
50 − 100, 000 31.7 12.5 17.9 14.0
100, 000+ 16.4 1.6 2.2 1.8
Financial Literacy
Inflation 34.2
Interest 52.0
Diversification 1 39.9
Diversification 2 13.0
Risk 1 (Private bond vs. deposit) 83.8
Risk 2 (Stocks vs. gov bonds) 89.1
Risk 3 (Equity fund vs. bond fund) 81.0
Risk 4 (Housing vs. deposits) 75.0
Account statement 50.8 54.7
Inflation 60.5 64.1
Compare returns 27.2 29.5
Interest compounding 39.6 42.5
Equity fund 51.3 54.3
Mortgage 53.6 56.9
N correct (%) 58.5 47.2 50.3
N don’t know (%) 11.9 34.2 30.4
N incorrect (%) 29.6 18.6 19.2
Zero correct 1.0 18.9 15.2
N 1,686 3,992 17,688 3,574

Data: Unicredit 2007 and SHIW 2006
90
Table 4.4: How much do you use each of these sources to have information
about your financial investments?
Bank Broker Friends, Econ TV/radio Econ pages

relatives, programs in non-econ
colleagues newspapers
Never 3.5 24.7 41.2 29.2 26.1

Seldom 8.0 9.0 23.9 24.7 20.6
Sometimes 25.8 23.0 22.5 29.9 29.8
Often 40.2 32.0 10.5 12.7 19.3
Very often 22.5 11.3 1.9 3.5 4.3
Econ inserts Econ Non-econ Econ Econ

in non-econ newspapers magazines magazines websites
newspapers
Never 36.8 30.8 45.8 50.4 50.1

Seldom 21.7 19.6 21.8 20.3 13.4
Sometimes 24.6 25.9 21.8 17.7 16.6
Often 14.0 15.6 8.5 9.6 12.5
Very often 3.0 8.1 2.1 2.1 7.4
Total 100 100 100 100 100

Unicredit 2007. N = 679. Conditional on spending at least some time to gather infor-
mation about how to manage savings and investments.
91
Table 4.5: Which of these statements best describes your behaviour in de-
ciding how to invest your savings?
Unconditional Conditional
on having
risky assets
I decide completely autonomously, the bank executes my decisions 8.60 12.03

I tell bank/advisor how I intend to invest and ask for their opinion 21.59 30.21
I consider bank/advisor proposals before deciding 27.16 38.01
I mostly rely on bank/advisor for my investment decisions 11.51 16.10
I let bank/advisor decide everything 2.61 3.65
Non-participation 28.53
Total 100 100

N 1,686 1,205
Unicredit 2007.
92
Table 4.6: Answers to financial literacy tests (N = 1,686)
Freq. Percent
Inflation:
More than today 39 2.3
Less than today 881 52.3
Same as today (correct) 577 34.2
Do not know 189 11.2
Interest:
Yes 388 23.0
No (correct) 876 52.0
Diversification 1 :
To have both bonds and stocks 282 16.7
Do not hold same asset for too long 111 6.6
Invest in as many assets as possible 144 8.5
Invest in more assets to limit risk exposure of single ones (correct) 672 39.9
Do not invest in very risky assets 292 17.3
Diversification 2 :
70% T-bills, 15% European equity fund, 15% in 2-3 Italian stocks 688 40.8
70% T-bills, 30% European equity fund (correct) 219 13.0
70% T-bills, 30% in 2-3 Italian stocks 117 6.9
70% T-bills, 30% in stocks of companies I know well 149 8.8
Correct on risk 1 1,413 83.8

Unicredit 2007.
Table 4.7: Financial literacy by degree of reliance on advice
Freq Mean Std. Dev.
I decide completely autonomously, the bank executes my decisions 145 4.97 1.33
I tell bank/advisor how I intend to invest and ask for their opinion 364 4.98 1.25
I consider bank/advisor proposals before deciding 458 5.09 1.32
I mostly rely on bank/advisor for my investment decisions 194 4.63 1.48
I let bank/advisor decide everything 44 4.30 1.19
Total 1205 4.94 1.34

Unicredit 2007.
93
Table 4.8: The determinants of preference among sources of information and
advice
Dep Var: Pr Dep Var: Pr Dep Var: Pr Dep Var: Pr Dep Var: Pr
use bank use bank/broker use informal use bank use bank/broker
(very) often (very) often (very) often more often more often
than informal than informal
(I) (II) (III) (IV) (V)
Female 0.079 0.109** 0.055 -0.024 -0.018

(0.06) (0.05) (0.03) (0.05) (0.05)
Age -0.021 -0.026 0.000 -0.023 -0.008
(0.02) (0.02) (0.01) (0.01) (0.02)
Age squared 0.000 0.000* -0.000 0.000* 0.000
(0.00) (0.00) (0.00) (0.00) (0.00)
Years school -0.014** -0.014** 0.001 -0.004 -0.003
(0.01) (0.01) (0.00) (0.01) (0.01)
FinW 100-150 th 0.016 0.035 -0.060** 0.153*** 0.155***
(0.06) (0.06) (0.03) (0.04) (0.05)
FinW 150-250 th -0.017 -0.025 -0.037 0.067 0.070
(0.06) (0.06) (0.03) (0.05) (0.05)
FinW 250-500 th -0.018 0.012 -0.038 0.034 0.035
(0.06) (0.06) (0.03) (0.05) (0.05)
FinW 500+ th 0.144* 0.106 -0.073*** 0.148*** 0.128**
(0.08) (0.08) (0.02) (0.05) (0.06)
Financial literacy 0.020 0.020 -0.028*** 0.044*** 0.047***
(0.02) (0.02) (0.01) (0.02) (0.02)
Self-confidence 0.125*** 0.187*** 0.047** -0.015 0.008
(0.04) (0.04) (0.02) (0.03) (0.03)
Finance sector -0.198* -0.175 -0.023 -0.185 -0.191
(0.12) (0.11) (0.05) (0.12) (0.12)
Trust advisor 0.186*** 0.200*** -0.010 0.082*** 0.097***
(0.03) (0.03) (0.01) (0.02) (0.02)
Years at UC: 6-10 -0.192* -0.180* 0.029 -0.128 -0.080
(0.10) (0.11) (0.07) (0.11) (0.11)
Years at UC: 11-20 -0.109 -0.083 0.058 -0.102 -0.060
(0.10) (0.10) (0.07) (0.10) (0.10)
Years at UC: > 20 -0.154 -0.138 0.035 -0.088 -0.085
(0.10) (0.10) (0.06) (0.09) (0.10)
Dep Var: Pr(Selection=1)
Very risk tolerant 0.384*** 0.387*** 0.401*** 0.409*** 0.408***

(0.11) (0.11) (0.10) (0.10) (0.10)
Risk tolerant 0.131** 0.142*** 0.147*** 0.141*** 0.138***
(0.05) (0.05) (0.04) (0.05) (0.05)
Risk averse 0.103** 0.110** 0.109*** 0.107** 0.107**
(0.05) (0.04) (0.04) (0.04) (0.04)
Saving: 0% -0.126*** -0.125*** -0.117*** -0.127*** -0.123***
(0.03) (0.03) (0.03) (0.03) (0.03)
N obs 1540 1540 1540 1540 1540

Wald test (ρ=0) 1.95 1.58 4.39 1.98 1.99
Wald test p-value 0.163 0.209 0.036 0.160 0.159
Unicredit 2007. Dep Var: Column I, probability of using the bank often or very often as a sources of financial
information; Column II, probability of using the bank or a broker often or very often as a sources of financial
information; Column III, probability of using informal sources (i.e. friends, relatives and colleagues) often or very
often as a sources of financial information; Column IV, probability of using the bank more often than informal
sources; Column V, probability of using the bank or a broker more often than informal sources. Model: heckman
probit (Marginal effects reported). Exclusion restrictions94
(reported in bottom part of the table) are risk preferences;
zero saving rate. Standard errors are robust to heteroskedasticity. Other regressors not reported: macro-regions,
individual income, occupational status, experience. Significance: *** p<0.01, ** p<0.05, * p<0.1.
Table 4.9: Investing autonomously or delegating financial decisions
Di = 1 Di = 2 Di = 3 Di = 4 Di = 5 Selection
Female -0.035*** -0.047*** 0.028*** 0.042*** 0.012** -0.002

(0.01) (0.02) (0.01) (0.02) (0.01) (0.03)
Age -0.001 -0.001 0.000 0.001 0.000 0.007
(0.00) (0.01) (0.00) (0.00) (0.00) (0.01)
Age squared -0.000 -0.000 0.000 0.000 0.000 -0.000
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Years school 0.005*** 0.006*** -0.004*** -0.005*** -0.001** 0.008**
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Self-employed -0.000 -0.000 0.000 0.000 0.000 0.018
(0.01) (0.02) (0.01) (0.02) (0.00) (0.03)
Retired 0.008 0.010 -0.007 -0.009 -0.002 -0.034
(0.02) (0.02) (0.02) (0.02) (0.01) (0.04)
North 0.022* 0.027* -0.018* -0.024* -0.006* 0.019
(0.01) (0.02) (0.01) (0.01) (0.00) (0.03)
Log tot ind income -0.008 -0.010 0.007 0.009 0.002 -0.002
(0.01) (0.01) (0.01) (0.01) (0.00) (0.01)
FinW 50-100 th -0.050** -0.071** 0.037** 0.064** 0.019** 0.105***
(0.02) (0.03) (0.02) (0.03) (0.01) (0.03)
FinW 100-150 th -0.032 -0.043 0.025 0.039 0.011 0.131***
(0.02) (0.03) (0.02) (0.03) (0.01) (0.03)
FinW 150-250 th -0.053** -0.078*** 0.038** 0.071** 0.022** 0.149***
(0.02) (0.03) (0.01) (0.03) (0.01) (0.03)
FinW 250-500 th -0.048** -0.069** 0.035** 0.063** 0.019* 0.162***
(0.02) (0.03) (0.02) (0.03) (0.01) (0.03)
FinW 500+ th -0.026 -0.036 0.020 0.032 0.009 0.173***
(0.03) (0.04) (0.02) (0.03) (0.01) (0.04)
Financial literacy -0.000 -0.001 0.000 0.000 0.000 0.046***
(0.00) (0.01) (0.00) (0.01) (0.00) (0.01)
Self-confidence 0.026*** 0.032*** -0.022*** -0.029*** -0.007** 0.028*
(0.01) (0.01) (0.01) (0.01) (0.00) (0.02)
Experience -0.000 -0.000 0.000 0.000 0.000 0.008***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Finance sector 0.111** 0.079*** -0.097** -0.077*** -0.016*** 0.054
(0.05) (0.02) (0.04) (0.02) (0.00) (0.06)
Trust advisor -0.076*** -0.093*** 0.063*** 0.084*** 0.022*** 0.046***
(0.01) (0.01) (0.01) (0.01) (0.00) (0.01)
Years at UC: 6-10 0.019 0.021 -0.016 -0.019 -0.005 0.089**
(0.03) (0.03) (0.02) (0.03) (0.01) (0.04)
Years at UC: 11-20 0.031 0.035 -0.027 -0.031 -0.008 0.208***
(0.03) (0.03) (0.02) (0.03) (0.01) (0.03)
Years at UC: > 20 0.018 0.022 -0.015 -0.020 -0.005 0.218***
(0.02) (0.03) (0.02) (0.03) (0.01) (0.04)
Very risk tolerant 0.225***
(0.02)
Risk tolerant 0.127***
(0.03)
Risk averse 0.138***
(0.03)
Saving: 0% -0.138***
(0.03)
N 1581
Log-Lik -2173.711
ρ 0.188
ρ std. err. 95 (0.168)
Data: Unicredit 2007. Dependent variable: columns I-V, probability of delegating financial decisions
(Di = 1, ..., 5); Column VI, probability of holding risky assets. Model: Ordered Probit with selection.
Exclusion restrictions (Column VI) are risk preferences; zero saving rate. Standard errors are robust to
heteroskedasticity. Significance: *** p<0.01, ** p<0.05, * p<0.1.
Table 4.10: Investing autonomously or delegating financial decisions
Di = 1 Di = 2 Di = 3 Di = 4 Di = 5
Female -0.030*** -0.056*** 0.026*** 0.049*** 0.011**
(0.01) (0.02) (0.01) (0.02) (0.00)
Age 0.000 0.000 -0.000 -0.000 -0.000
(0.00) (0.01) (0.00) (0.01) (0.00)
Age squared -0.000 -0.000 0.000 0.000 0.000
(0.00) (0.00) (0.00) (0.00) (0.00)
Years school 0.004*** 0.008*** -0.004*** -0.007*** -0.001***
(0.00) (0.00) (0.00) (0.00) (0.00)
Self-employed 0.000 0.000 -0.000 -0.000 -0.000
(0.01) (0.02) (0.01) (0.02) (0.00)
Retired 0.005 0.008 -0.004 -0.007 -0.001
(0.01) (0.02) (0.01) (0.02) (0.00)
North 0.016 0.029 -0.015 -0.025 -0.005
(0.01) (0.02) (0.01) (0.02) (0.00)
Center -0.006 -0.011 0.006 0.010 0.002
(0.01) (0.02) (0.01) (0.02) (0.00)
Log tot ind income -0.007 -0.012 0.007 0.011 0.002
(0.01) (0.01) (0.01) (0.01) (0.00)
FinW 50-100 th -0.035** -0.070** 0.029*** 0.062** 0.014*
(0.01) (0.03) (0.01) (0.03) (0.01)
FinW 100-150 th -0.021 -0.039 0.018 0.034 0.008
(0.02) (0.03) (0.01) (0.03) (0.01)
FinW 150-250 th -0.038*** -0.078** 0.031*** 0.069** 0.017*
(0.01) (0.03) (0.01) (0.03) (0.01)
FinW 250-500 th -0.033** -0.065** 0.028*** 0.058** 0.013*
(0.01) (0.03) (0.01) (0.03) (0.01)
FinW 500+ th -0.015 -0.028 0.013 0.024 0.005
(0.02) (0.04) (0.02) (0.04) (0.01)
Financial literacy -0.012** -0.003 0.037*** -0.017** -0.005**
(0.01) (0.01) (0.01) (0.01) (0.00)
Self-confidence 0.022*** 0.039*** -0.021*** -0.033*** -0.007***
(0.01) (0.01) (0.01) (0.01) (0.00)
Experience 0.000 0.001 -0.000 -0.000 -0.000
(0.00) (0.00) (0.00) (0.00) (0.00)
Finance sector 0.104** 0.105*** -0.104** -0.091*** -0.014***
(0.05) (0.02) (0.04) (0.02) (0.00)
Trust advisor -0.085*** -0.018 -0.009 0.086*** 0.026***
(0.01) (0.02) (0.02) (0.01) (0.00)
Years at UC: 6-10 0.024 0.038 -0.024 -0.032 -0.006
(0.02) (0.03) (0.02) (0.03) (0.00)
Years at UC: 11-20 0.037* 0.057** -0.036* -0.048** -0.009**
(0.02) (0.03) (0.02) (0.02) (0.00)
Years at UC: > 20 0.024 0.042 -0.023 -0.036 -0.007
(0.02) (0.03) (0.02) (0.03) (0.01)
N obs 1116
Log-Lik -1419.615
Unicredit 2007. Dep Var: probability of delegating financial decisions (Di = 1, ..., 5),
where Di =1: I decide completely autonomously, the bank executes my decisions; Di =2:
I tell bank/advisor how I intend to invest and ask for their opinion; Di =3: I consider
bank/advisor proposals before deciding; Di =4: I mostly rely on bank/advisor for my
investment decisions; Di =5: I let bank/advisor decide everything. Model: Generalized
Ordered Probit (marginal effects reported).96
Sub-sample of investors holding risky assets.
Standard errors reported in parentheses are robust to heteroskedasticity. Significance:
*** p<0.01, ** p<0.05, * p<0.1.
Table 4.11: Investing autonomously or delegating – Robustness on financial
literacy index
Di = 1 Di = 2 Di = 3 Di = 4 Di = 5
Financial literacy 1 -0.0100** -0.0023 0.0298*** -0.0137** -0.0039**

(0.005) (0.009) (0.008) (0.006) (0.002)
Financial literacy 2 -0.0070* -0.0019 0.0208*** -0.0084 -0.0035**

(0.004) (0.007) (0.008) (0.006) (0.002)
Financial literacy 3 -0.0033 0.0027 0.0141** -0.0096* -0.0040***

(0.004) (0.007) (0.007) (0.005) (0.002)
Financial literacy 4 -0.0016 0.0023 0.0078 -0.0054 -0.0031**

(0.003) (0.005) (0.005) (0.004) (0.001)
Unicredit 2007. Dep Var: probability of delegating financial decisions (Di = 1, ..., 5),
where Di =1: I decide completely autonomously, the bank executes my decisions;
Di =2: I tell bank/advisor how I intend to invest and ask for their opinion;
Di =3: I consider bank/advisor proposals before deciding; Di =4: I mostly rely
on bank/advisor for my investment decisions; Di =5: I let bank/advisor decide ev-
erything. Model: Generalized Ordered Probit (marginal effects reported). Defi-
nition of financial literacy indices: Financial literacy 1: the baseline (Guiso and
Jappelli, 2008), re-scaled (10 × (Inf lation + Interest + Diversif 1 + Diversif 2 +
Risk1 + Risk2 + Risk3 + Risk4)/8; Financial literacy 2: 10 × [Inf lation + Interest +
Diversif 1 + Diversif 2 + (Risk1 + Risk2 + Risk3 + Risk4)/4]/5; Financial literacy
3: 10 × [Interest + Diversif 1 + Diversif 2 + (Risk1 + Risk2 + Risk3 + Risk4)/4]/4;
Financial literacy 4: 10 × [Interest + Diversif 1 + Diversif 2]/3. Sub-sample of
investors holding risky assets. Regressors not reported: same covariates as in Ta-
ble 4.10. Standard errors reported in parentheses are robust to heteroskedasticity.
Significance: *** p<0.01, ** p<0.05, * p<0.1.
97
Table 4.12: Financial literacy and length of bank relationship
Whole Use bank Use bank (Di = 3) (Di = 3)

sample often or more often and do not
very often than friends use brokers
Years at UC: 6-10 -0.243 -0.295 -0.412* -0.102 0.144

(0.15) (0.27) (0.25) (0.25) (0.28)
Years at UC: 11-20 -0.102 0.019 -0.035 -0.036 0.090
(0.15) (0.27) (0.24) (0.23) (0.26)
Years at UC: > 20 -0.018 0.006 0.070 -0.036 0.010
(0.15) (0.26) (0.23) (0.21) (0.26)
N obs 1116 393 475 429 320

Adj. R2 0.121 0.089 0.127 0.129 0.149
Unicredit 2007. Dep Var: Financial literacy (baseline). Model: linear regression model es-
timated by OLS. Standard errors are robust to heteroskedasticity. Regressors not reported:
gender, age, education, occupational status, macro-regions, log income, financial wealth cat-
egories, trust, self-confidence, experience, working in the financial sector. Significance: ***
p<0.01, ** p<0.05, * p<0.1.
Table 4.13: First stage for financial literacy endogeneity
Dep var: Fin Lit (UCS)
Experience 0.018***
(0.00)
Regional Fin Lit (SHIW) 0.426**
(0.15)
N obs 1116
F excl instr 18.71
Hansen J 1.893
Hansen J p-val 0.169
Endog test 0.200
Endog test p-val 0.655
Unicredit 2007. Dep Var: Financial Literacy (baseline). Model:
linear model estimated by GMM (only the first stage is reported).
Standard errors reported in parentheses are robust to heteroskedas-
ticity and clustering on regions. Regressors not reported: gender,
age, education, occupational status, macro-regions, financial wealth
categories, log individual income, self-confidence, financial sector
dummy, trust, length of bank relationship. Significance: *** p<0.01,
** p<0.05, * p<0.1.
98
Table 4.14: Investing autonomously or delegating (controlling for financial
literacy endogeneity)
Di = 1 Di = 2 Di = 3 Di = 4 Di = 5
Financial literacy -0.018 -0.026 0.085** -0.028 -0.013

(0.03) (0.05) (0.04) (0.04) (0.01)
Fitted residuals 0.007 0.028 -0.057 0.012 0.010
(0.03) (0.05) (0.04) (0.04) (0.01)
N obs 1116
Log-Lik -1417.376
Unicredit 2007. Dep Var: probability of delegating financial decisions (Di =
1, ..., 5), where Di =1: I decide completely autonomously, the bank executes my
decisions; Di =2: I tell bank/advisor how I intend to invest and ask for their opin-
ion; Di =3: I consider bank/advisor proposals before deciding; Di =4: I mostly
rely on bank/advisor for my investment decisions; Di =5: I let bank/advisor
decide everything. Model: Generalized Ordered Probit, controlling for financial
literacy endogeneity via control function approach (marginal effects reported). In-
struments for financial literacy: average financial literacy at regional level (SHIW)
and experience with financial products (UCS). Bootstrapped standard errors (200
repetitions) are robust to heteroskedasticity and clustering at regional level. Re-
gressors not reported: same covariates as in Table 4.10. Sub-sample of investors
holding risky assets. Significance: *** p<0.01, ** p<0.05, * p<0.1.
99
Table 4.15: Investing autonomously or delegating – Robustness on
bank/broker relationships
Di = 1 Di = 2 Di = 3 Di = 4 Di = 5
Sample: Unicredit main or only bank (baseline) (N = 1,116)

Financial literacy -0.012** -0.003 0.037*** -0.017** -0.005**
(0.01) (0.01) (0.01) (0.01) (0.00)
Sample: Unicredit only bank (N = 802)

Financial literacy -0.016** 0.005 0.033*** -0.017* -0.005
(0.01) (0.01) (0.01) (0.01) (0.00)
Sample: Unicredit main/only bank

and use broker never/seldom/sometimes (N = 847)
Financial literacy -0.012 0.002 0.032*** -0.016* -0.005**
(0.01) (0.01) (0.01) (0.01) (0.00)
Sample: Unicredit main/only bank

and use broker never/seldom (N = 705)
Financial literacy -0.012 0.001 0.037*** -0.019* -0.007**
(0.01) (0.01) (0.01) (0.01) (0.00)
Unicredit 2007. Dep Var: probability of delegating financial decisions (Di =
1, ..., 5), where Di =1: I decide completely autonomously, the bank executes my
decisions; Di =2: I tell bank/advisor how I intend to invest and ask for their opin-
ion; Di =3: I consider bank/advisor proposals before deciding; Di =4: I mostly
rely on bank/advisor for my investment decisions; Di =5: I let bank/advisor de-
cide everything. Model: Generalized Ordered Probit. Regressors not reported:
same covariates as in Table 4.10. Standard errors are robust to heteroskedasticity.
Significance: *** p<0.01, ** p<0.05, * p<0.1.
100
Table 4.16: Trust in own financial advisor/bank advisor
(I) (II) (III) (IV) (V) (VI)
Female 0.185*** 0.182*** 0.183*** 0.178*** 0.181*** 0.178***

(0.05) (0.05) (0.05) (0.05) (0.05) (0.05)
Age 0.007 0.007 0.005 0.004 0.004 0.004
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Age squared -0.000 -0.000 -0.000 -0.000 -0.000 -0.000
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Years school 0.003 0.003 0.006 0.006 0.004 0.005
(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Log tot ind income -0.066** -0.063** -0.058** -0.058** -0.060** -0.060**
(0.03) (0.03) (0.03) (0.03) (0.03) (0.03)
FinW 50-100 th 0.043 0.030 0.050 0.042 0.042 0.038
(0.09) (0.09) (0.09) (0.09) (0.09) (0.09)
FinW 100-150 th 0.118 0.112 0.123 0.122 0.122 0.122
(0.08) (0.08) (0.08) (0.08) (0.08) (0.08)
FinW 150-250 th 0.149* 0.129 0.139 0.135 0.132 0.130
(0.08) (0.09) (0.09) (0.09) (0.09) (0.09)
FinW 250-500 th 0.286*** 0.267*** 0.273*** 0.276*** 0.267*** 0.270***
(0.08) (0.08) (0.08) (0.08) (0.08) (0.08)
FinW 500+ th 0.543*** 0.501*** 0.508*** 0.505*** 0.494*** 0.495***
(0.11) (0.11) (0.11) (0.11) (0.11) (0.11)
Financial literacy -0.013 -0.009 -0.013 -0.008 -0.009 -0.006
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Self-confidence 0.053 0.053 0.050 0.042 0.050 0.043
(0.03) (0.03) (0.03) (0.03) (0.03) (0.03)
Experience 0.003 0.003 0.003 0.002 0.002 0.002
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Finance sector -0.332* -0.309* -0.293* -0.278 -0.291* -0.279
(0.17) (0.17) (0.17) (0.17) (0.17) (0.17)
Years at UC: 6-10 -0.126* -0.121 -0.136* -0.137* -0.130* -0.132*
(0.07) (0.07) (0.08) (0.07) (0.08) (0.07)
Years at UC: 11-20 -0.124* -0.126* -0.128* -0.120* -0.128* -0.121*
(0.07) (0.07) (0.07) (0.07) (0.07) (0.07)
Years at UC: > 20 -0.146** -0.134** -0.140** -0.129* -0.126* -0.120*
(0.07) (0.07) (0.07) (0.07) (0.07) (0.07)
Generalized trust 0.181***
(0.06)
Trust in banks 2.287** 1.767* 1.409
(1.00) (1.01) (1.04)
GDP growth 0.016 0.012 0.016 0.012
(0.01) (0.01) (0.01) (0.01)
Referendum 2006 0.022*** 0.017**
(0.01) (0.01)
Senate 2006 0.041*** 0.035***
(0.01) (0.01)
Constant 3.838*** 3.811*** 2.795*** 0.567 3.036*** 1.078
(0.52) (0.51) (0.63) (0.91) (0.59) (0.92)
N obs 1581 1581 1581 1581 1581 1581

Adj. R-Squared 0.051 0.051 0.052 0.058 0.056 0.060
Data: Unicredit 2007. Dep Var: Trust in own financial advisor/bank official. Model: linear model esti-
101 are robust to heteroskedasticity and clustering
mated by OLS. Standard errors reported in parentheses
on provinces. Regressors not reported: occupational status, macro region, Significance: *** p<0.01, **
p<0.05, * p<0.1.
Table 4.17: Delegating financial decisions (controlling for trust endogeneity)
First Stage Second Stage
Dep Var: Trust P r(Di ≥ 4) Di
Model: Probit LPM

(I) (II) (III) (IV)
Trust in banks 1.784*

(0.99)
Referendum 2006 0.019***
(0.01)
Trust advisor 0.089 -0.024 0.096
(0.16) (0.21) (0.45)
Fitted residuals 0.025
(0.16)
N obs 1581 1116 1116 1116

F excl instr 4.629 4.629
Hansen J 0.516 0.342
Endog test 0.307 0.298
Endog test p-val 0.580 0.585
Unicredit 2007. First column: first stage regression, where the de-
pendent variable is trust towards advisor and the model is estimated
by OLS. Second column: second stage regression, where the depen-
dent variable is the probability of delegating (Di ≥ 4) and a pro-
bit model is estimated, instrumenting trust with a control function
(Bootstrapped standard errors with 200 repetitions). Third column:
second stage regression, where the dependent variable is the proba-
bility of delegating (P r(Di ≥ 4)) and a linear probability model is
estimated by GMM. Fourth column: second stage regression, where
the dependent variable is delegation (Di ) and the model is esti-
mated by GMM. Regressors not reported: gender, age, education,
occupational status, macro-regions, log individual income, financial
wealth categories, financial literacy, self-confidence, experience, fi-
nancial sector dummy, length of bank relationship. Standard errors
reported in parentheses are robust to heteroskedasticity and cluster-
ing on provinces. Significance: *** p<0.01, ** p<0.05, * p<0.1.
102
Table 4.18: Delegating financial decisions (effect of trust across length of
relationship)
Unicredit customers Unicredit customers

for ≤ 5 years for > 5 years
(Dep Var: P r(Di ≥ 4)) (Dep Var: P r(Di ≥ 4))
Trust advisor 0.102*** 0.114***

(0.04) (0.02)
N obs 82 1034
Log-Lik -82.135 -1218.851
Unicredit 2007. Dep Var: Probability of Delegating Financial Decisions
(P r(Di ≥ 4)). Model: Generalized Ordered Probit. Regressors not reported:
gender, age, education, occupational status, macro-regions, log individual in-
come, financial wealth categories, financial literacy, self-confidence, experience,
financial sector dummy. Standard errors reported in parentheses are robust to
heteroskedasticity. Significance: *** p<0.01, ** p<0.05, * p<0.1.
Table 4.19: Delegating financial decisions (effect of trust across financial

literacy levels)
Financial Literacy Financial Literacy

Below average (≤ 4) Above average (> 4)
(Dep Var: P r(Di ≥ 4)) (Dep Var: P r(Di ≥ 4))
Trust advisor 0.109*** 0.109***

(0.03) (0.02)
N obs 384 732

Log-Lik -467.370 -841.552
Unicredit 2007. Dep Var: Probability of Delegating Financial Decisions
(P r(Di ≥ 4)). Model: Generalized Ordered Probit. Regressors not reported:
gender, age, education, occupational status, macro-regions, log individual in-
come, financial wealth categories, self-confidence, experience, financial sector
dummy, length of bank relationship. Standard errors reported in parentheses
are robust to heteroskedasticity. Significance: *** p<0.01, ** p<0.05, * p<0.1.
103
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Chiara Monticone

Financial Literacy and Financial Advice

PhD Thesis 2011-007

Scuola di Dottorato in Economia “Vilfredo Pareto”

Scuola di Dottorato in Economia “Vilfredo Pareto”

Supervisore: prof. Riccardo Calcagno

Dipartimento di Scienze Economiche e Finanziarie “G. Prato”

Dipartimento di Statistica e Matematica Applicata “Diego de Castro”

Dipartimento di Politiche Pubbliche e Scelte Collettive

Dipartimento di Scienze Economiche e Metodi Quantitativi

1 Financial literacy: a review on the state of research and

2 The determinants of financial literacy in Italy and the role

4 Financial literacy and the demand for financial advice 67

First of all, I am deeply grateful to Riccardo Calcagno for his valuable

Financial literacy: a review

On the related issue of financial education there is more agreement

1.3 Measurement issues

Before discussing tests in detail, I will spend a few words on ‘subjec-

- Test-based measures are not absolute measures (i.e., defining what

- It is important whether a ‘don’t know’ option is offered or not. Not

- The methodology used to build a synthetic measure of financial lit-

To (partially) address these measurement issues, several surveys that

- Do you think that the following statement is true or false?: Buying

Hung et al. (2009) exploit the occurrence of different financial literacy

Finally, it is interesting to note that some authors resorted to “induced”

1.4 The determinants of financial literacy

1.5.1 Planning and saving for retirement

1.5.2 Pension plan participation and retirement choices

1.5.4 Portfolio diversification

1.5.5 Minimizing fees

1.5.6 Other aspects of financial behaviour

Descriptive evidence about financial literacy and debt behaviour in Aus-

Gerardi et al. (2010) investigates the effect of numerical ability (mea-

Brown et al. (2008) examine individuals’ self-reported willingness to ex-

1.5.7 The direction of causality

- Bernheim (1998) estimates a retirement wealth regression where finan-

- Kimball and Shumway (2007) estimate the effect of financial literacy

1.6 Discussion and open issues

- In the strand of literature assessing the effect of financial literacy on

- It is sometimes assumed that higher financial literacy can grant higher

- The issue of the direction of causality between financial literacy and

- The various definitions (and much of the research presented) implicitly

Appendix: Financial literacy tests

Dataset: Health and Retirement Study 2004 – Module 8.

Dataset: Rand American Life Panel

Basic Financial Literacy Questions

Sophisticated Financial Literacy Questions

1. Function of Stock Market

Dataset: National Longitudinal Survey of Youth 1997 (US)

Dataset: own survey

Dataset: University of Michigan’s monthly Survey of Consumers (April 2005)

Dataset: University of Michigan’s monthly Survey of Consumers (Nov/Dec 2001)

Dataset: own survey (US)

Dataset: DNB Household Survey (Netherlands) – two special modules

Basic Literacy questions

Advanced Literacy questions

Dataset: FSA (UK) SECTION N - MONEY QUIZ

Dataset: SHIW 2006 (Italy).

Dataset: 2007 Unicredit Consumer’s Survey (Italy)

* * *** PREVIOUS BALANCE AS OF 05/05/2006 320

House as inheritance/gift 0.058* 0.053*

Two earners 0.029 0.026