Financial Literacy, Trust and Financial Advice

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1 Financial Literacy, Trust and Financial Advice Chiara Monticone May 28, 2010 PRELIMINARY PLEASE DO NOT QUOTE Abstract Using the 2007 Unicredit Customers Survey, this paper investigates the role of investors personalized trust and financial literacy on investment behavior. In particular, the paper aims to assess the implications of financial literacy and trust on the use of financial advice for investment decisions, conditional on stock market participation. Both elements positively affect the probability of holding risky assets. In addition, trust in financial advisors increases the propensity to follow advisors recommendations. Financial literacy is helpful in turning investors away from non-professional sources of advice and reduces the probability of relying on financial advice, by reducing the costs of investing autonomously. Keywords: financial literacy, trust, stock market participation, financial advice, delegation JEL codes: D12, D8, D91, G11 1 Introduction The literature on household finances has devoted much attention to households limited stock market participation (Haliassos and Bertaut, 1995). In spite of the historical equity premium and of welfare considerations, large shares of households in many countries do not own stocks, either directly or indirectly (Guiso et al., 2001). Among the main explanations put forward in the literature, information costs and transaction costs have a prominent role (Vissing-Jorgensen, 2004). UniTo CeRP/CCA. Address: CeRP/Collegio Carlo Alberto, via Real Collegio, Moncalieri (TO), Italy. Telephone: Fax: chiara.monticone@unito.it. I would like to thank Laura Marzorati at Unicredit for making the UCS data available; Federica Palermo at the Ministry of Interior for her help with the referendum data; the Fondazione Rodolfo Debenedetti (FRDB) for making the TFR Survey data available. 1

2 A related aspect of investment behavior that received less attention has to do with how stock market participation is performed. Do individuals decide by themselves how to invest? Do they seek advice, and from whom? To what extent they rely on the advice they receive? This is relevant because investment performance (or investment mistakes) may depend on who takes decisions about portfolio management and this ultimately has an impact on household wealth accumulation. We argue that trust and financial literacy are important elements in this decision. First, consumers may seek advice from sources that do not fully act in their interest. For instance, 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 prospecting for customers and advising them (Inderst and Ottaviani, 2009). Even when financial advisors are not direct representatives of the seller, they can be faced by conflicts or interest because buy recommendations generate more commissions than sell recommendations, or because optimistic analysts may have better relationships with companies in the future (Krausz and Paroush, 2002). Conflicts of interests may arise also from market imperfections (Bolton et al., 2007). In all these situations, where investors may be afraid of being cheated by their advisors or broker, trust becomes important for the investment to take place. Gambetta (1998) defines trust as the subjective probability 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 one s own bank or financial advisor) has a positive role in stockholding. Similarly, 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 is afraid 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 when the was enrollment automatic. Second, in the decision about whether to rely on the advice of an intermediary (or of an advisor who could provide potentially deceptive advice), the investor s financial knowledge and skills are likely to have a role. Indi- 2

3 vidual investors financial literacy can be important in affecting the choice of financial advisors (or information sources), as is suggested by the empirical evidence. In general, more financially literate individuals tend to select better advice, i.e. they prefer professionals to informal sources, such as relatives and friends (Bernheim, 1998; Lusardi and Mitchell, 2006; van Rooij et al., 2007). Apart from the effect on advisor s selection, financial literacy should have a more direct influence. As long as more financially literate investors have a better understanding of financial products and concepts, they should have an easier access to financial markets. van Rooij et al. (2007) show that financial literacy is related to higher stock market participation among Dutch households. A basic level of financial knowledge can be indeed interpreted as a way to reduce participation costs, because it reduces the cost of becoming informed about investment opportunities and it improves awareness of the benefits, as well as of risks, of stock market participation. If financial literacy increases stock market participation, then it should also increase the probability of investing autonomously, especially if advice is potentially deceptive. The theoretical model developed by Guiso et al. (2008) is used here to study the separate roles of trust and financial literacy, and to provide testable implications. To explore this relation empirically we employ the 2007 Unicredit Customers Survey (UCS). The survey is representative of the customers of one of the largest Italian banks and contains detailed information on socio-demographic characteristics, wealth holdings (also outside the bank), and portfolio composition. The 2007 survey also contains additional information on financial literacy, trust and investment attitudes. This paper contributes to the literature by investigating the role of trust and financial knowledge on the extent to which customers rely on the financial advice from the bank (or from a financial advisor) for their portfolio management. We concentrate on the bank relations because banks represent the main source of financial information, both within this sample and in Italy in general. A survey of investors behavior in Italy shows that banks are the main source of financial information and advice, both with respect to professional sources of advice and overall, and that that trust toward banks is quite high, in spite of their potential conflict of interest (Beltratti, 2007). Concerning the supply side, it should be remarked that independent financial advice (fee-based) is almost non-existent in Italy. We find that both higher trust in advisors and higher financial literacy increase the probability of holding risky assets. As expected, trust in financial advisors increases the propensity to follow advisors recommendations. At the same time financial literacy is helpful in turning investors away from non-professional sources of advice and reduces the probability of relying on financial advice, by reducing the costs of investing autonomously. 3

4 The rest of the paper is organized as follows. Section 2 provides a simple theoretical framework. Section 3 presents the dataset and the construction of the main variables used in the analysis. Section 4 describes the distribution of financial knowledge and personalized trust in the sample. Section 5 analyzes the stock market participation and delegation decisions. Section 6 concludes. 2 Theoretical framework Relying on a financial advisors requires the investor to believe not only that the advisor is able to provide good advice, but most of all that he will choose to do so. The extreme case of full reliance on advice borders delegation, even if there is no formal delegating contract, and from the investor s point the outcome is not very different. In order to study the separate roles of trust and financial literacy, and to derive testable implications, I will use with the appropriate adaptations the theoretical model developed in Guiso et al. (2008) in relation to trust and stock market participation. The investor can choose among two assets: a riskless asset with certain return r f, and a risky one with uncertain return r. Given an initial wealth W, the investor can choose to invest all her wealth in the safe asset, or to invest a share α of her wealth in the risky assets. Moreover, in participating to the stock market, she can decide to invest autonomously or to rely on the advice of a financial advisor. Clearly, there are different degree to which the investor can rely on financial advice, but for simplicity I will only consider the two extremes of complete delegation and full autonomy. In addition to the risk associated with the return of the risky asset, the investor is faced with the risk that the advice may be deceptive or that the broker runs away with the money. The investor s subjective probability of being cheated by the advisor is defined as her mistrust p, corresponding to the probability independent of that of the asset s returns that the value of the financial investment turns out to be zero. Moreover, I will assume that participation is associated with participation costs c. In deciding whether to invest in the risky asset or not, the investor compares the expected utility of participation and that of non-participation, and invests in the risky assets only if the former is larger, that is if (1 p j )EU[(α r+(1 α)r f )(W c j )]+p j U[(1 α)r f (W c j )] U(W r f ) (1) where j = {advisor; self}. According to Propositions 1 in Guiso et al. (2008), there is a trust threshold that triggers participation. There exist a level of mistrust p such that the investor is indifferent between the two terms of the expression in (1); 4

5 only investors with trust above the threshold (1 p) hold the risky asset. Moreover, as in standard portfolio problems with participation costs, only investors with initial wealth above a threshold invest in the risky asset. Moreover, Proposition 3 in Guiso et al. (2008) shows that the introduction of participation costs in the problem increases the trust threshold that triggers participation, that is the higher the participation costs, the higher the minimum level of trust necessary to participate. The intuition behind this proposition is that when the gain from participation decreases, a higher trust is required to participate. Similarly, Proposition 4 shows that in the presence of mistrust the wealth threshold that triggers participation is increasing in p. The idea is that when the investor perceives a positive probability of being cheated, the effect of the fixed cost increases because she has to pay a cost up-front but will receive a positive return only with probability (1 p). This framework can be extended to study the decision to rely on financial advice. The structure of the expected utility function in the case of self-investment and delegation can be considered to be similar: when the principal delegates her financial decisions she may perceive a positive probability of being cheated by the agent, because he may be dishonest or simply not up to his job; when the investor, instead, decides to invest by herself, she is implicitly making a judgement on her ability to perform the task, which depends both on her true ability and on her self-confidence. In addition each alternative faces (partly) different participation costs. The expected utility from delegation can be written as (1 p adv )EU[(α r + (1 α)r f )(W c adv )] + p adv U[(1 α)r f (W c adv )] where p adv is the mistrust towards the advisor and c adv are the costs the investor has to bear in case she decides to participate and to to follow financial advice about her portfolio decision. These can include monetary costs b directly related to visiting an advisor, such as fees and commissions, and other costs a related to participation in the stock market, such as becoming aware of investment opportunities, determining whether trading is optimal, and setting up an account (for first-time investors) (Vissing-Jorgensen, 2004). I will assume that the second category of costs is influenced by the investor s financial literacy F L: c adv = f(a(f L), b). Analogously, the expected utility from autonomous investment can be written as (1 p self )EU[(α r + (1 α)r f )(W c self )] + p self U[(1 α)r f (W c self )] where (1 p self ) is investor s self-confidence about her ability to manage her portfolio and c self are the costs the investor has to bear if she participates without delegating her portfolio management. These costs include 5

6 not only the same costs a related to participation in the stock market that were mentioned above, but also costs k related to time/money spent 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 assets (Vissing-Jorgensen, 2004, p. 179). Both types of costs are clearly related to the investor s financial literacy F L; moreover, the cost of learning is also related to the investor s opportunity cost of time t. For any given level of financial literacy, busier investors are presumably less willing to spend time to manage their portfolios than investors with a lower cost of time. This is consistent with the findings of Hackethal et al. (2009) who study the investment behaviour of the customers of a large German brokerage firm and investigate the probability that investors have their accounts run by an independent financial advisor (IFA). They show that IFAs tend to be matched with wealthier and older investors, who presumably delegate their investment decisions (also) because of a high opportunity cost of time. Participation costs of investing autonomously can be expressed as c self = f(a(f L), k(f L, t)). This simple theoretical framework helps to derive some theoretical implications to be tested empirically. The implications about stock market participation are: i. higher trust (either in one s self or in a financial advisor) should induce a higher likelihood of participation, because it increases the expected return from participation ii. higher financial literacy, implying lower participation costs, should predict a higher participation probability, since part of the participation costs (a(f L)) are related to financial literacy, regardless of whether delegation occurs The implications concerning delegation vs. autonomous investment are: iii. higher trust in advisors and lower confidence in one s own ability should make delegation more likely iv. higher financial literacy should make delegation less likely, because it reduces the cost of investing by one s self v. a higher opportunity cost of time should make delegation more likely vi. the effect of trust (on both participation and delegation ) should be larger for less financially literate individuals, because reducing participation costs should reduce the trust threshold that triggers participation 6

7 The results of the empirical analysis are in favor of points i. to iv. However, cost of time does not seem to matter for the decision to rely on financial advice and there is no significantly different effect of trust on either participation or delegation across different financial literacy levels. 3 Data The Unicredit Customers Survey is a representative sample of the customers of the banks of one of the largest Italian banks (Unicredit group). Eligible account holders are years of age and hold accounts of at least 10,000 euro at the end of The 2007 UCS survey samples 1,686 account holders. Even though sample selection 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 pensions). Additionally, the account holder is asked about her relations with the bank, her attitudes towards investments, and her level of financial literacy. The financial literacy measure is constructed as in Guiso and Jappelli (2008) and measures the number of correct answers to eight questions on interest, inflation, understanding risk diversification and understanding the riskiness of various financial products. The average index corresponds to 4.7 correct questions, and less than 1% of the sample can answer all of them correctly. Table 2 shows the distribution of correct answers. The measure of personalized trust is based on the question Overall, how much trust do you have in your bank advisor or financial promoter concerning your financial investments? with the answers ranging from 1 (No trust at all) to 5 (I trust a lot). The average answer is 3.8, and the distribution of personalized trust is in Table 3. See Table 1 for the construction of the variables contained in the UCS and for data sources for the variables not contained in the UCS. 4 Determinants of Financial Literacy and Trust This section investigates the distribution of trust and financial literacy in the sample, and assesses whether there is a relation between the two. As for trust, we want to know who trusts advisors, and whether trust is built over time (with the length of bank s relationship). As for financial literacy, it is important to verify whether its distribution across socioeconomic groups is analogous to what is found in representative samples of the whole Italian population, or whether this sample displays some peculiarities. Moreover, it is interesting to see whether there is a relation between 7

8 financial literacy and trust in financial advisors. In principle, trust and literacy could be positively or negatively correlated. On the one hand, we would expect a negative relation between trust and financial knowledge, in the sense that very trusting individuals might feel less of a need to learn about finance because they believe they can confidently delegate their financial decisions to experts. However, if individuals build their trust over time, as they become more knowledgeable about the bank and finance in general, we could expect trust and literacy to be positively correlated. Results from Table 4 show that trust does not appear to be related to the length of bank relations, even after controlling for the use of Unicredit as the main bank. Clearly, it is possible that trust itself affects the choice of the bank. In this case, trust would be a requisite for starting a relationship with a bank, rather than an outcome of this relation. The fact that there is no clear relation between trust and relationship duration is in favor of the second interpretation. Personalized trust towards bank/advisors may be related to generalized trust and social capital. Column I reports the effect of generalized trust expressed by UCS respondents. Generalized trust and specific trust are positively correlated. In addition, Column II reports the effect of trust in banks at the regional level, which is unsurprisingly positively related to trust in advisors in the UCS. Columns III to VI report the effect of some the elements that should affect trust according to the social capital literature. Since previous research has shown the link between cross-country trust and economic growth, the GDP growth rate at the province level is added as a control in all the following specifications (Dincer and Uslaner, 2010; Knack and Keefer, 1997; Zak and Knack, 2001). Since Guiso et al. (2004) use blood donations and participation to referenda as measures of social capital, Column III includes the per capita number of blood donations in 1995 within a province and Column IV the turnout at provincial level at the 2006 referendum. Only referendum participation is positively and significantly related to trust in financial advisors, while blood donations are not significant. Finally, Zak and Knack (2001) develop a theoretical model of trust and growth, providing the additional implication that societies with higher wage inequality should display lower levels of trust. Indeed, income inequality (and polarization in wider sense) are found to be negatively related to trust in Zak and Knack (2001)and Knack and Keefer (1997). In Column V, however, income inequality at the regional level does not affect trust. Moreover, Putnam (1993) stresses the role of associational activities associations for trust and economic cooperation. However, the role of associations not only on economic performance, but on trust itself, has been contended. Knack and Keefer (1997) note that associations may break down information asymmetries and serve as occasions for interaction, but at the 8

9 same time can reinforce polarizations within a society, as long as they are formed along (e.g.) ethnic, political, religious groups. In the present case the regional participation rate to associations in 2006 does not significantly affect trust (not reported). Table 5 shows the determinants of financial literacy. 1 Column I of Table 5 confirms basic findings about the determinants of financial literacy as they have been found in the literature about Italy and other countries (Australia and New Zealand Banking Group, 2008; Lusardi and Mitchell, 2007; Monticone, 2010; van Rooij et al., 2007). Females perform worse than males and the age profile is increasing up to some point and then declining. Financial knowledge is positively associated with wealth. In line with this evidence, private banking customers show higher knowledge. Differently from previous evidence, respondents living in the south are not less skilled than respondents in the rest of the country. Column II shows that there is no significant relation between financial literacy and trust. Even though the trust coefficient is negative, financial literacy does not appear to have any statistically significant relation with trust, suggesting that the argument that investors may not acquire knowledge because they trust bank officials/finanical advisors does not hold. This may be related to fact that UCS samples relatively rich investors, who may be more knowledgeable and trusting than the average population. Column III shows that financial literacy is strongly related with past experience with risky assets. This is in line with previous literature indicating experience as the most important source of learning about financial knowledge (Hilgert et al., 2003). Finally, an indicator of time preference is included in Column IV. Consistently with the idea that acquiring financial literacy is a human capital investment, Meier and Sprenger (2008) show that individuals who heavily discount the future are more likely to remain financially illiterate. Their study reports the result from a field study eliciting time preferences and willingness to participate in a free credit counseling program, and shows that more patient respondents are more likely to participate in counseling. As expected, also in this study patience is positively related to financial knowledge, even though it turns insignificant when both patience and experience are included in the same regression (Column V). 1 Even though some right-hand-side variables are likely to be endogenous (e.g. wealth, experience), these regressions are just intended to show correlations and endogeneity will not be corrected for. 9

10 5 Financial Advice Before analyzing the effects of financial literacy and trust on investors choice about how to invest, some descriptive evidence is presented about the use of various sources of advice. In particular, it is interesting to study whether respondents ask for information and advice in taking portfolio decisions, whom they address for advice, and what drives the choice of each source of information/advice. 5.1 Sources of Financial Advice First of all, Table 6 shows that many do not spend any time to become informed about financial issues: as much as 39% of those who have risky assets does not devote time to gather information about how to manage their savings and investments. Considering only those who spend some time to become informed (Table 7), banks are the sources of advice visited most often, followed by brokers. This confirms the finding about the overall Italian population reported in Beltratti (2007). Table 8 explores the determinants of the frequency of use of the various sources. The estimates are performed using Heckman s maximum likelihood estimator, in order to correct for the selection induced by spending some time to search information and holding risky assets. As expected, trust in financial advisors is related to a higher use of banks and financial advisors as sources of information/advice. The level of financial literacy is negatively related to the use of friends, relatives and colleagues for advice. This is consistent with the evidence found by Bernheim (1998); Lusardi and Mitchell (2006); van Rooij et al. (2007). No relation is there between financial knowledge and the use of banks/brokers and tv/newspapers/internet as source of advice. Self-assessed financial ability is positively associated with the use of brokers, family/friends, and tv/newspapers/internet. Experience in trading securities is not associated with the use of any source. 5.2 Reliance on Financial Advice As trust and financial knowledge appear to have an important role in the decisions to participate in the stock market and to seek advice, the rest of the section will investigate the decisions to participate and to rely extensively on financial advice for portfolio decisions. The choice between investing autonomously or delegating is reported in Table 9. 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. In the following analysis, we will consider as delegating those who indicate I mostly rely on bank/advisor for my investment decisions or 10

11 I let bank/advisor decide everything as the best description of how they invest their savings. Since the question about the extent of reliance on financial advice behaviour is asked only if the respondent reports having risky assets, the relation is estimated by probit regression controlling for the selection induced by participation (Heckman probit). Given the way the data are constructed, risky assets include all financial products apart from the transaction account. Table 10 presents the results (marginal effects) for the the determinants of stock market participation (first stage of Heckman probit). Two variables are are included only in the selection equation, in order to achieve identification: a preference for liquidity 2 and whether the household has a mortgage. Stock market participation should be related with background risk, and having a mortgage represents a sizeable source of financial risk. As expected, both variables significantly reduce the probability of holding risky assets. In general, the results of Table 10 confirm previous findings in the literature. Higher education, higher risk tolerance and higher financial wealth holdings are positively related to the probability of stock market participation. Living in southern regions is associated with a lower probability of holding risky assets. A longer experience with financial assets is related to a higher probability of holding risky assets at the time of interview. Columns II V show that, as in van Rooij et al. (2007), financial literacy is positively associated to stock market participation. A unit change in the financial literacy index increases the probability of holding risky assets by about 2%. As in Guiso et al. (2008), personalized trust predicts a higher probability of holding risky assets. The same is true for self-assessed financial ability, consistently with the predictions of the theoretical model. In Columns IV and V, an additional explanatory factor is the length of relationship with the bank (longer relation is related to higher participation), which is robust to the exclusion of respondents who have relationships with banks other than Unicredit (Column V). Table 11 presents the results (marginal effects) for the the determinants of delegation (second stage of Heckman probit, where each column corresponds to those of Table 10). The results of Column I can be roughly compared to those of (Hackethal et al., 2009, Table 2) about the determinants of having the account run by a financial advisor. The only common result is that female are more likely to delegate. However, in the Italian sample, age and wealth turn out not to have any effect. Moreover, the hypothesis that busier investors are more 2 The preference for liquidity is captured by a question asking If you could decide today how to invest 100, how much of this you would invest in liquidity, i.e. in assets that can be sold easily and quickly, with no risk of losses 11

12 likely to delegate because they face a high opportunity cost does not find much support in these results: neither individual income, nor labor market status (being self-employed) are significant determinants. Other significant explanatory variables are years of education, with higher education being related to a lower delegation probability, and risk preferences, with risk averse individuals being more likely to delegate. The effects of financial literacy, self-assessed financial ability and trust in advisors are consistent with the theoretical predictions. Financial literacy (Columns II to V) makes delegation less likely by reducing the cost of investing autonomously. Confidence in experts and lack of confidence in one s self make delegation more likely, by increasing the expected return of this option. Experience and length of bank relation have no impact on the delegation choice. These results point to the role of trust and financial literacy in shaping investor s relations with financial advisors. Trusting individuals are not only more likely to participate, but they also have a higher probability of relying on the bank advisors or their financial advisors for advice. 5.3 Combined Effect of Trust and Financial Literacy The theoretical framework of section 2 indicated that the introduction (or the increase) of participation costs increases the trust threshold that triggers participation/delegation, that is the higher the participation costs, the higher the minimum level of trust required to participate. This suggests that the effect of trust should be higher for low financial literacy investors. Indeed, Guiso et al. (2004) and Guiso et al. (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. In this case, neither the interaction between trust and financial literacy, nor the one between trust and education, have a significant impact on the use of financial advice or on stock market participation. 5.4 Trust Endogeneity Trusting towards financial advisors is likely to be endogenous with respect to the choice of delegating, in the sense that an investor could increase her trusts if she delegated in the past and was satisfied with the job, or if trust influences the choice of the bank/advisor. Table 12 estimates the same equation as in Column IV of Table 11, instrumenting trust in advisors with turnout at the 2006 referendum at the provincial level (controlling for provincial GDP growth) and average trust towards banks at the regional level. As Table 4 shows, referendum turnout significantly affects trust and should not have any relation with financial 12

13 delegation. However, the F test on excluded instruments reported at the bottom of the table is quite 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 because the instruments are weak. For most of the other covariates the sign and significance remain the same as without instrumenting. Analogous results are obtained estimating the probability of delegation by probit and instrumenting trust by means of the control function approach. 6 Concluding remarks We use survey data from the 2007 Unicredit Customers Survey to investigate heterogeneity in investment behavior due to differences across investors in personalized trust and financial literacy. This paper aims to assess the implications of these two factors, the role of which has been examined separately by the existing literature (Guiso et al. (2008); van Rooij et al. (2007)), on stock market participation, and on delegation of financial decisions, conditional on stock market participation. As expected, both financial literacy and trust positively affect the probability of holding risky assets. As expected, personalized trust is strongly related to the propensity to delegate financial decisions. Financial literacy, on the contrary, is negatively related with the probability of delegation, because it reduces the burden on investing autonomously. References Agnew, J. R., L. Szykman, S. P. Utkus, and J. A. Young (2007). Literacy, trust and 401(k) savings behavior. Working paper , Center for Retirement Research at Boston College. Australia and New Zealand Banking Group (2008). ANZ Survey of Adult Financial Literacy in Australiaa. Melbourne, Australia: Australia and New Zealand Banking Group. Beltratti, A. (2007). Gli impieghi del risparmio. In A. Beltratti (Ed.), Finanza Globale, Risparmiatore Locale XXV Rapporto BNL/Centro Einaudi sul risparmio e sui risparmiatori in Italia. BNL Edizioni, Guerini e Associati. Bernheim, D. D. (1998). Financial illiteracy, education, and retirement saving. In O. S. Mitchell and S. J. Schieber (Eds.), Living with Defined Contribution Pensions, pp The Pension Research Council, Wharton School Pension Research Council, University of Pennsylvania. 13

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16 Table 1: Variable Description and Data Sources Variable Description Source Financial Literacy The financial literacy measure is constructed as in Guiso and Jappelli (2008). One point is given if the respondent can answer correctly to each of the following questions: - 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; - 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 - What do you think having correctly diversified investments means? Having in one s own portfolio both bonds and stocks Do not invest for too long in the same financial 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 - 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 UCS Self-assessed financial ability Trust toward financial advisors Generalized trust 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 - Private bonds are at least as risky as current accounts - Stocks at least are as risky as government bonds - Stocks mutual funds are at least as risky as bonds mutual funds - Housing are at least as risky as current accounts It is based on the question: For each of these ten assets I would like you to tell me how much you think you know it, where the answer can be in the range 1 (I do not know it at all) to 5 (I know it very 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. It is based on the question Overall, how much trust do you have in your bank advisor or financial advisor concerning your financial investments? with the answers ranging from 1 (No trust at all) to 5 (I trust a lot). It is a dummy based on the World Values Survey question Generally 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 think that most people can be trusted Continues UCS UCS UCS 16

17 Table 1: (continued) Variable Description Source 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 conducted TFR Sur- 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 Blood donations The blood donations variable is taken from the Guiso et al. (2004) Guiso et al. dataset and it refers to the number of blood bags per million of in- (2004) habitants in the province collected by AVIS, the Italian Association of Blood Donors, in 1995 Referendum Voter turnout at the province level for the 2006 constitutional referendum Ministry of Interior Income inequality Income inequality is measured by the Gini index at regional level of SHIW household labor and pension income computed on the 2006 Bank of Italy s Survey of Households Income and Wealth data. 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 Patience It is based on the question: Imagine you win 100,000 euro in a lottery. This amount of money will be given you in a year. However, if you give up part of the money, you can receive the rest immediately. To receive the money immediately, would you be willing to receive 95,000 euro? UCS Yes Would you accept to receive 90,000 euro? Yes Would you accept to receive 80,000 euro? Yes No No No Would you accept to receive 97,000 euro? Yes No Would you accept to receive 98,000 euro? Yes No, I d rather wait one year Preference liquidity for It is captured by a question asking If you could decide today how to invest 100, how much of this you would invest in liquidity, i.e. in assets that can be sold easily and quickly, with no risk of losses UCS 17

18 Table 2: Number of correct answers to financial literacy tests Freq. Percent Total 1, Data: Unicredit 2007 Table 3: Trust in bank/financial advisor Freq. Percent Not at all Little Medium High Very high Total 1, Data: Unicredit

19 Table 4: Dep Var: trust in financial advisors/bank officials (OLS) I II III IV V VI Female 0.171*** 0.166*** 0.168*** 0.167*** 0.169*** 0.165*** (0.06) (0.06) (0.06) (0.06) (0.06) (0.06) Age (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) Age squared (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Years school (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) Self-employed (0.06) (0.06) (0.06) (0.06) (0.06) (0.06) Center (0.07) (0.09) (0.06) (0.05) (0.06) (0.06) South and Isles ** (0.08) (0.10) (0.10) (0.16) (0.07) (0.15) Log tot ind income (0.03) (0.03) (0.03) (0.03) (0.03) (0.03) Log H FinW (0.03) (0.03) (0.03) (0.03) (0.03) (0.03) H FinW refuse (0.32) (0.31) (0.32) (0.32) (0.32) (0.32) Very risk averse *** *** *** *** *** *** (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) Experience (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Financial literacy (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) Years at UC: (0.15) (0.15) (0.15) (0.15) (0.15) (0.15) Years at UC: * * * ** * ** (0.14) (0.14) (0.14) (0.14) (0.14) (0.14) Years at UC: * * * * * * (0.15) (0.15) (0.15) (0.15) (0.15) (0.15) Years at UC: More * * * * * (0.16) (0.16) (0.16) (0.16) (0.16) (0.16) Unicredit only bank 0.352*** 0.376*** 0.364*** 0.373*** 0.361*** 0.380*** (0.09) (0.09) (0.09) (0.09) (0.09) (0.09) Unicredit main bank 0.323*** 0.339*** 0.330*** 0.341*** 0.329*** 0.347*** (0.10) (0.11) (0.10) (0.10) (0.10) (0.11) Generalized trust 0.148*** (0.05) Trust in banks 2.191** 1.690* (0.88) (0.88) GDP growth ** (0.02) (0.02) (0.01) (0.01) Blood donations (1.81) Referendum *** 0.016** (0.01) (0.01) Gini Income (0.89) Contant 3.536*** 3.372*** 3.385*** 2.236*** 3.290*** 2.429*** (0.52) (0.49) (0.51) (0.69) (0.62) (0.66) N obs Adj.R-Squared Data: Unicredit Standard errors reported in parentheses are robust to heteroskedasticity and clustering on provinces. 19

20 Table 5: Dep Var: financial literacy (OLS) I II III IV V Female *** *** ** *** ** (0.09) (0.09) (0.09) (0.09) (0.09) Age 0.064** 0.065** ** (0.03) (0.03) (0.03) (0.03) (0.03) Age squared ** ** ** (0.00) (0.00) (0.00) (0.00) (0.00) Years school 0.153*** 0.153*** 0.121*** 0.152*** 0.120*** (0.05) (0.05) (0.04) (0.05) (0.04) Years school squared ** ** * ** * (0.00) (0.00) (0.00) (0.00) (0.00) Married (0.11) (0.11) (0.11) (0.11) (0.11) Divorced (0.16) (0.16) (0.16) (0.16) (0.16) Widow(er) (0.17) (0.17) (0.16) (0.17) (0.16) Number H components 0.075** 0.076** 0.081** 0.072* 0.080** (0.04) (0.04) (0.04) (0.04) (0.04) Employee (0.17) (0.17) (0.16) (0.17) (0.16) Self-employed (0.17) (0.17) (0.16) (0.17) (0.16) Unemployed ** * * * * (0.62) (0.62) (0.57) (0.62) (0.57) Retired (0.17) (0.17) (0.16) (0.17) (0.16) North-east (0.10) (0.10) (0.10) (0.10) (0.10) Center (0.10) (0.10) (0.10) (0.10) (0.10) South and Isles (0.10) (0.10) (0.10) (0.10) (0.10) Log H FinW 0.119*** 0.119*** 0.077** 0.116*** 0.076** (0.04) (0.04) (0.04) (0.04) (0.04) H FinW refuse 1.166*** 1.167*** 0.750* 1.130*** 0.738* (0.42) (0.42) (0.41) (0.42) (0.41) Private banking 0.489*** 0.503*** 0.354*** 0.484*** 0.353*** (0.13) (0.13) (0.12) (0.13) (0.12) Log tot ind income (0.04) (0.04) (0.04) (0.04) (0.04) Trust advisor (0.04) Experience 0.061*** 0.060*** (0.01) (0.01) Experience squared *** *** (0.00) (0.00) Patience 0.965* (0.52) (0.52) Constant * (0.89) (0.91) (0.88) (0.99) (0.99) N obs Adj. R-Squared Data: Unicredit Heteroscedasticity robust standard errors in parentheses.

21 Table 6: How much time do you devote on average in a week to gather information about how to manage your savings and your investments? Unconditional Conditional on having risky assets No time h/month h/week h/week h/week h/week h/week No risky assets Total N 1,686 1,205 Unicredit Table 7: How much do you use each of these sources to have information about your financial investments? (N = 679) Bank Financial Friends, Econ TV/radio Econ pages promoter relatives, programs in non-econ colleagues newspapers Never Seldom Sometimes Often Very often Econ inserts Econ Non-econ Econ Econ in non-econ newspapers magazines magazines websites newspapers Never Seldom Sometimes Often Very often Total Unicredit Conditional on spending at least some time to gather information about how to manage savings and investments. 21

22 Table 8: Frequency of use of sources of information / advice (Heckman) Bank Financial Friends, Econ TV/radio Newspapers/ Econ promoter relatives, programs Magazines websites colleagues (average) Female * * ** (0.14) (0.19) (0.15) (0.14) (0.09) (0.14) Age * (0.04) (0.05) (0.05) (0.05) (0.03) (0.05) Age squared (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Years school *** ** 0.039*** (0.01) (0.02) (0.02) (0.01) (0.01) (0.02) Employee ** (0.23) (0.33) (0.26) (0.22) (0.18) (0.24) Self-employed (0.23) (0.33) (0.27) (0.21) (0.17) (0.24) Unemployed * *** * *** (0.34) (0.59) (0.45) (0.34) (0.28) (0.33) Retired (0.28) (0.36) (0.29) (0.25) (0.18) (0.24) Log H FinW *** (0.08) (0.09) (0.11) (0.06) (0.06) (0.07) H FinW refuse *** (0.93) (0.98) (1.19) (0.68) (0.63) (0.74) Experience (0.02) (0.02) (0.03) (0.02) (0.01) (0.02) Experience squared (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Very high trust 2.074*** 1.895*** (0.30) (0.31) (0.83) (0.26) (0.30) (0.43) High trust 1.800*** 1.615*** (0.27) (0.27) (0.85) (0.25) (0.29) (0.42) Medium trust 1.310*** 1.103*** (0.27) (0.29) (0.83) (0.26) (0.30) (0.43) Little trust 0.801** * (0.38) (0.32) (0.85) (0.39) (0.31) (0.52) Financial literacy (G&J) ** (0.05) (0.06) (0.07) (0.05) (0.03) (0.05) I know financial products *** 0.336** 0.334*** 0.458*** 0.355*** (0.11) (0.13) (0.17) (0.11) (0.08) (0.14) Years at UC: < * *** ** 2.064*** (0.71) (0.68) (0.41) (0.73) (0.32) (0.28) Think carefully (0.07) (0.10) (0.12) (0.09) (0.06) (0.09) Cons ** (2.19) (2.36) (3.39) (1.70) (1.46) (1.97) N obs Wald test (ρ=0) p-value Unicredit Standard errors reported in parentheses are robust to heteroskedasticity. 22