How Risk Aversion and Financial Literacy Shape Young Adults’ Investment Preferences

Stoian, Andreea and Vintila, Nicoleta and Iorgulescu, Filip and Cepoi, Cosmin Octavian and Dina Manolache, Aurora (2021): How Risk Aversion and Financial Literacy Shape Young Adults’ Investment Preferences.

Abstract

This study investigates the relationship between risk aversion, financial literacy, and investment preferences of young adults in higher education in Romania. For this purpose, we conducted a survey that measured the basic, advanced and overall financial literacy, risk aversion, and parental financial behaviours. We had 479 respondents and a similar number of useable surveys. Resorting to OLS and IV econometric methods, we show that financial literacy, regardless of its level, contributes to reducing risk aversion quantified by the risk premium. Moreover, positive financial behaviours of parents also decrease the risk aversion. This finding is invalid in the case of a self-assessed risk tolerance. We also found that young adults' investment preferences are influenced by the self-assessed risk tolerance and not by the risk aversion. However, financial literacy increases the probability of young adults to select bonds or funds as investment options, but does not have a statistically significant influence on the selection of stocks, which is mainly driven by the self-assessed risk profile as well as bank deposits.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial literacy, risk aversion, risk premium, investment choices, survey methods
• Subjects: C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology ; Computer Programs > C83 - Survey Methods ; Sampling Methods; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

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