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Trust, Sociability and Stock Market Participation

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Abstract

We investigate the effects of both trust and sociability for stock market participation, the role of which has been examined separately by existing finance literature. We use internationally comparable household data from the Survey of Health, Ageing and Retirement in Europe supplemented with regional information on generalized trust from the World Value Survey and on specific trust to financial institutions from Eurobarometer. We show that trust and sociability have distinct and sizeable positive effects on stock market participation and that sociability is likely to partly balance the discouragement effect on stockholding induced by low generalized trust in the region of residence. We also show that specific trust in advice given by financial institutions represents a prominent factor for stock investing, compared to other tangible features of the banking environment. Probing further into various groups of households, we find that sociability can induce stockholding among the less well off in Sweden, Denmark, and Switzerland where stock market participation is widespread. On the other hand, the effect of generalized trust is strong in countries with limited participation and low average trust like Austria, Spain, and Italy, offering an explanation for the remarkably low participation rates of the wealthy living therein.

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... These, in turn, influence the financial decisions of individuals and, hence, aggregate financial-market outcomes. A number of socio-cultural factors have been identified as important determinants of households' financial decisions, including social interaction (Hong et al., 2004; Brown et al., 2008), religion affiliation and activity (Renneboog and Spaenjers, 2012), trust (Guiso et al., 2004, 2008; Georgarakos and Pasini, 2011), and mood states or affect (Guven, 2012). The purpose of this section is not to provide a comprehensive review of this literature , but rather to highlight the main channels linking trust and happiness to the financial and insurance decision-making process of individuals. ...
... Trusting others raises the probability of buying stocks by 50% (relative to the sample's mean probability) and increases the share of income invested in stocks by 3.4% points (15.5% of the sample mean). Georgarakos and Pasini (2011) add to this research by linking trust and sociability to the significant regional differences in stockholding in 10 major European countries, and conclude that both factors should be taken into account when studying households' stock-market participation decisions. ...
... These, in turn, influence the financial decisions of individuals and, hence, aggregate financial-market outcomes. A number of socio-cultural factors have been identified as important determinants of households' financial decisions, including social interaction (Hong et al., 2004; Brown et al., 2008), religion affiliation and activity (Renneboog and Spaenjers, 2012), trust (Guiso et al., 2004Guiso et al., , 2008 Georgarakos and Pasini, 2011), and mood states or affect (Guven, 2012). The purpose of this section is not to provide a comprehensive review of this literature , but rather to highlight the main channels linking trust and happiness to the financial and insurance decision-making process of individuals. ...
Article
A recent line of research highlights trust as an important element guiding the decision of households to invest into risky financial assets and insurance products. This paper contributes to this literature by identifying happiness as another key driver of the same decision. Using detailed survey data from a sample of Dutch households, we show that the impact of happiness on households' financial decisions works in the opposite direction and is more economically important compared to trust. Specifically, happiness leads to a lower probability of investing into risky financial assets and having insurance, while trust has the usual positive effect found in the literature. Furthermore, the negative effect of happiness on the ownership of risky financial assets is about 6% higher compared to the positive equivalent of trust. Similarly, the negative effect of happiness on the ownership of insurance is 3% higher than the positive effect of trust.
... Recent papers suggest that household participation in the stock market is driven by factors such as optimism (Puri and Robinson, 2007), trust in …nancial markets (Guiso et al., 2008), intelligence quotient (Grinblatt et al., 2011), genetics (Barnea et al., 2010 ), political orientation (Kaustia and Torstila, 2011), the ability to understand investment (Graham et al., 2009; Christelis et al., 2010), stock market return experience (Malmendier and Nagel, 2011), educational attainment and …nancial sophistication (Christelis et al., 2011), …nancial literacy (Cardak and Wilkins, 2009; Van Rooij et al., 2011), cognitive ability (Benjamin et al., 2013), and sociability (Hong et al., 2004; Bönte and Filipiak, 2012). Recently, Georgarakos and Pasini (2011) assess the joint importance of trust and sociability on stock market participation. They show that trust and sociability a¤ect stock ownership through distinct channels, where mistrust lowers the expected return on investment , making stock market participation unattractive, and sociability serves to reduce the …xed cost of participation through cheaper information sharing. ...
... iso et al. (2008), and jointly consider the distinct role of stock market literacy and trust on households' stock ownership decisions. Moreover, we empirically test whether sociability is capturing the e¤ect of stock market literacy and hence whether it is literacy, rather than sociability, that matters for understanding stock market participation. Georgarakos and Pasini (2011) document that more sociable households reduce their participation costs through cheaper information sharing, thereby increasing participation. We argue that sociability actually proxies for households'stock market literacy, and hence introducing stock market literacy, which is the aggregate product of stock market knowledge and awarenes ...
... We argue that sociability actually proxies for households'stock market literacy, and hence introducing stock market literacy, which is the aggregate product of stock market knowledge and awareness, should capture the e¤ect of sociability on stock market participation. Moreover, we argue that the evidence for the distinct roles of trust and sociability on stock ownership observed by Georgarakos and Pasini (2011) can be explained by the unique and distinct e¤ects of trust and stock market literacy on participation. As in Guiso et al. (2008), we de…ne trust as the …rm reliance on the characteristics of the …nancial system such as sound management, quality of investor protection, e¤ective regulation and supervision, etc. ...
Article
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This article studies the importance of stock market literacy and trust for stock ownership decisions. We find that these two distinct channels simultaneously explain not only the probability of participation, but, conditional on participation, also explain the share of investment in stocks. Once we account for stock market literacy, sociability is no longer significant for participation; what matters is literacy rather than sociability. Further, we observe that economic shocks and future expectations are key behavioral characteristics that explain a household’s decision to invest in stocks. However, upon participation, a larger set of behavioral characteristics explains the level of stock investment.
... Comparing the first two sets of columns of Table 3, it is evident that the participation rate in risky assets is much higher in Sweden than in the USA. 14 High Swedish stock-market participation rates have been documented elsewhere (Georgarakos and Pasini, 2009), and suggest that the selection bias in stock market participation is not as important as it is in the USA. Swedish households also tend to invest much more of their risky assets in 13 Other products include lottery bonds, subscription rights, right offerings, and options. ...
... [Table 3 Comparing the first two sets of columns ofTable 3, it is evident that the participation rate in risky assets is much higher in Sweden than in the USA. High Swedish stock-market participation rates have been documented elsewhere (Georgarakos and Pasini, 2009), and suggest that the selection bias in stock market participation is not as important as it is in the USA. Swedish households also tend to invest much more of their risky assets in mutual funds than American households. ...
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We use a detailed panel data set of Swedish households to investigate the relation between their labor income risk and financial investment decisions. In particular, we relate changes in wage volatility to changes in the portfolio holdings for households that switched industries between 1999 and 2002. We find that households do adjust their portfolio holdings when switching jobs, which is consistent with the idea that households hedge their human capital risk in the stock market. The results are statistically and economically significant. A household going from an industry with low wage volatility to one with high volatility will ceteris paribus decrease its portfolio share of risky assets by up to 35%, or USD 15,575.
... However, noneconomic factors also matter for investment decisions. For example, both Guiso et al (2008) and Georgarakos and Pasini (2011) find that low levels of trust are negatively associated with stock market participation. Relatedly, Dearmon and Grier (2011) show at the macro level that trust is important for human and physical capital accumulation. ...
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Using data from a lab experiment carried out in Kenya, we show that while “legitimate” costs and costs imposed by corruption both deter investment, the latter is no more of a disincentive than the former. We interpret the evidence as consistent with the conclusion that our participants viewed corruption as just another cost of doing business. We also experimented with giving participants in some treatments information about the corruption expectations of participants in previous sessions and the actual extent of corruption in previous sessions. We find some evidence that the objective information actually increased investment without changing the participants’ own expectations regarding corruption. That result is compatible with the idea that revealing the level of corruption changes the descriptive norm and facilitates investment in a corrupt environment.
... Our focus on the sophistication of retail cryptocurrency investors and on whether the demand for cryptocurrencies is driven by distrust in fiat money and/or the commercial financial industry contributes to the literature of the sociology of financial markets (Pixley, 2004;Knorr Cetina and Preda, 2005;Preda, 2007;Knorr Cetina and Preda, 2012). Lack of trust has been shown to be a main driver of investment decisions and limited stock market participation (see Guiso et al. (2008); Georgarakos and Pasini (2011);Balloch et al. (2015)). 11 Given the paramount importance of trust for the monetary and 8 Our findings also suggest that experience with digital finance, captured through having a debit card, and using a mobile payment app, increases the probability of investing in cryptocurrencies. ...
Preprint
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Employing representative data from the U.S. Survey of Consumer Payment Choice, we disprove the hypothesis that cryptocurrency investors are motivated by distrust in fiat currencies or regulated finance. Compared with the general population, investors show no differences in their level of security concerns with either cash or commercial banking services. We find that cryptocurrency investors tend to be educated, young and digital natives. In recent years, a gap in ownership of cryptocurrencies across genders has emerged. We examine how investor characteristics vary across cryptocurrencies and show that owners of cryptocurrencies increasingly tend to hold their investment for longer periods.
... Consistent with this, Heimer (77) documents that social interaction is more prevalent among active investors (who buy and/or sell stocks) than passive investors who hold US savings bonds. Furthermore, proxies for sociability or connectedness are associated with greater stock market participation (45,67,78) and investment in more volatile or skewed stocks (79). The model also implies that convexity of investment flows derives from social interaction, consistent with evidence on social influence on stock market participation in Finland (45). ...
Article
The thoughts and behaviors of financial market participants depend upon adopted cultural traits, including information signals, beliefs, strategies, and folk economic models. Financial traits compete to survive in the human population and are modified in the process of being transmitted from one agent to another. These cultural evolutionary processes shape market outcomes, which in turn feed back into the success of competing traits. This evolutionary system is studied in an emerging paradigm, social finance. In this paradigm, social transmission biases determine the evolution of financial traits in the investor population. It considers an enriched set of cultural traits, both selection on traits and mutation pressure, and market equilibrium at different frequencies. Other key ingredients of the paradigm include psychological bias, social network structure, information asymmetries, and institutional environment.
... Empirical evidence of industrialized countries provided by Guiso et al. (2003) documents a relevant positive correlation between stock market participation and household financial wealth, supporting the entry costs thesis (see also Alan 2006). Other studies have suggested that participation depends on a variety of factors, including age and education (Bertraut 1998), risk aversion (Campbell and Cochrane 2000), trust in financial institutions (Georgarakos and Pasini 2011), social interaction (Hong et al. 2004), home ownership (Vestman 2013), and social capital (Guiso et al. 2004). ...
... In addition to the factors as mentioned above, attention has also been focused on several additional factors in recent years (see, for example, in Guiso et al. (2008), Georgarakos and Pasini (2011), Changwony et al. (2015), Agarwal and Chua (2020) and Liu et al. (2020a, b)), and more potential factors are being explored too. For instance, prompted by Hong et al.'s (2004) work, many researchers have paid increasing attention to the effect of social interaction on stock market participation. ...
Article
Purpose: This paper studies the effects of lottery preference on stock market participation at the macro level. Design/methodology/approach: The authors use the abnormal search volume intensity for lottery-related keywords from the Baidu search engine to capture retail investors' lottery preference. To measure stock market participation, they use five different macro-level measures from various angles. They perform the time series regression analysis in their empirical study. Findings: First, the validation tests show that the lottery preference index in this study is reasonable. Further, the authors find that lottery preference increases people's propensity to enter and trade in the stock market. Besides, they find that the effect on trading behavior is asymmetric, that is, high lottery preference has a more significant impact on trading behavior than low lottery preference. However, lottery preference has no significant effect on the stockholding. Originality/value: This paper contributes to the growing literature that examines the determinants of stock market participation and the role of lottery/gambling preference in the financial market. It also provides direct and novel evidence for Statman's (2002) conclusions about the similarity of lottery players and stock traders.
... Proposition 5 provides several new predictions that are testable using data on investor social networks. Some of these predictions are untested, but there is supporting evidence for part 1. Survey evidence indicates that greater household involvement in social activities is associated with greater stock market participation both in the United States (Hong et al. (2004)) and 10 European countries (Georgarakos and Pasini (2011)). Furthermore, Heimer (2014) documents that social interaction is more prevalent among active investors who buy and/or sell stocks than passive investors who hold U.S. savings bonds, thereby supporting our explanation for the active investing puzzle in which informal communication tends to promote active rather than passive strategies. ...
Article
We offer a new social approach to investment decision making and asset prices. Investors discuss their strategies and convert others to their strategies with a probability that increases in investment returns. The conversion rate is shown to be convex in realized returns. Unconditionally, active strategies (e.g., high variance and skewness) dominate, although investors have no inherent preference for these characteristics. The model has strong predictions for how the adoption of active strategies depends on investors’ social networks. In contrast with nonsocial approaches, sociability, self-enhancing transmission, and other features of the communication process determine the popularity and pricing of active investment strategies.
... ECOFORUM [Volume 9, Issue 2 (22), 2020] that respect, it is important to say, as pointed out by Arts (2018), that in addition to financial literacy, academic literature discusses other individual characteristics influencing stock market participation, which social interaction (Hong, Kubik & Stein, 2004), trust (Balloch, Nicolae & Philip, 2014) and sociability (Georgarakos & Pasini, 2011) and gender (Almenberg & Dreber, 2015). The central issue addressed in this paper is the relationship between investors' financial literacy and their investment strategy. ...
Article
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The main goal of this paper is to empirically analyse the relationship between financial literacy and investment strategy of individual investors from the underdeveloped capital market of Bosnia and Herzegovina. The OECD INFE Core Questionnaire (2011) was mainly used for measuring financial literacy. Using the purposive sampling technique, 89 individual investors were selected. The research was conducted in Bosnia and Herzegovina during the third quarter of 2019. To gain a better understanding of the relationship between entrepreneurs' financial literacy and their decision making styles we primarily use structural equation modeling. The research findings have revealed a statistically-significant impact of financial attitudes, financial behaviour and financial knowledge on active investment strategy. Findings suggest that active investment approach may be raised via enhancing the financial literacy of the investors. Therefore, these results may produce useful pieces of information which might be helpful in the creation of tailored-made training programs which would meet the needs of investors in Bosnia and Herzegovina.
... Falk et al. 2016), such as stock market participation (e.g. Georgarakos and Pasini 2011;Guiso et al. 2008). In the context of SRI, Nilsson (2008) as well as Wins and Zwergel (2016) examine the influence of individuals' trust related to SRI based on survey data. ...
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Given the increasing role of socially responsible investing (SRI), but still limited participation of individual (i.e. small, retail) investors, the objective of this study is twofold: (i) We aim to identify investment barriers regarding SRI for individual investors and analyze to what extent these barriers vary across different investor groups. (ii) We analyze to what extent sustainability or transparency labels can help to overcome these barriers. To this end, we empirically analyze data from a survey and a stated choice experiment for a broad sample of financial decision makers in German households. The results suggest that a considerable amount of respondents can imagine to invest in a socially responsible manner, which is promising for policymakers and practitioners who aim to foster sustainable development and SRI. However, too high information costs are a severe barrier for potential future investors and a considerable share of respondents distrusts providers of socially responsible investment products. Banks, who could help to solve this problem, appear not to fulfill their role as intermediaries. But we find that labels might serve as a complement to banks. Especially sustainability certificates that confirm the consideration of sustainability criteria could decrease information costs and overcome at least some barriers for some investor groups, particularly for new investors. However, the results also suggest that a certain degree of basic knowledge and trust in providers of socially responsible investment products is required before labels work efficiently.
... La Porta et al (1997) demonstrate that trust is important for a wide range of macro level outcomes including governance and infrastructure. Trust has also been shown to matter for investment behaviour (Guiso et al, 2008;Georgarakos and Pasini, 2011;Klein and Shtudiner, 2015), labour market participation (Tu and Bulte, 2010), the level of TFP and its growth rate (Bjørnskov and Méon, 2015), and human and physical capital accumulation (Dearmon and Grier, 2011). Interpersonal trust is also important in terms of support for and the effectiveness of redistributive policies (Daniele and Geys, 2015;Bergh and Bjørnskov, 2014). ...
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Using Afrobarometer data, we show that experiencing bribery in the course of one's interactions with the public sector lowers one's trust in big private corporations, small businesses and local traders. As trust in market institutions is vital to the efficient functioning of an economy, our findings point to a previously unknown and potentially substantial cost of corruption. This relationship is evident even when we control for perceptions of corruption. Our findings are not driven by corruption lowering interpersonal trust. Having to pay a bribe for household services is the corrupt interaction most strongly associated with the decline in private sector trust. Copyright
... To this end, we compare it to the generalized trust in people question (TRUST_GEN) which has been used in early studies relating trust and financial markets (e.g. Guiso et al. 2008; Georgarakos & Pasini 2011) and is worded " Are you generally a person who trusts others or do you tend to be distrustful of others? " with possible scores ranging from 0 ( " I do not trust others at all. ...
Conference Paper
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In this study, we investigate how two key dimensions of trust formation, i.e. interpersonal trust in the advisor (narrow-scope trust) and broader trust in the business context in which the advisor operates (broad-scope trust), impact households’ overall trust in financial advice. To capture the potential influence of broad-scope trust, we make use of novel survey data obtained from the Panel on Household Finances (PHF) and contrast households’ propensity to trust financial advice provided by advisors employed at community banks versus large banks, which have been shown to feature fundamentally different trust profiles. We document that financial advice provided by large-bank advisors is significantly less likely to be trusted, i.e. rejecting the notion that trust in financial advice is essentially equivalent to trusting one’s financial advisor. Instead, we provide strong evidence in support of an integrated conceptualization of clients’ trust in financial advice, which highlights the importance of establishing broad-scope trust.
... 3 Numerous theories, such as participation costs (Vissing-Jorgensen, 2002; Briggs, Cesarini, Lindqvist, and¨Ostlingand¨ and¨Ostling, 2016), information barriers (Hong, Kubik, and Stein, 2004; Li, 2014), and certain behavioral biases (Haliassos and Bertaut, 1995; Malmendier and Nagel, 2011) have been proposed to account for the lack of stock market participation. Our analysis, however, is intimately related to a recent strand of literature that underscores the influence of social trust on stock investment (GSZ 2008, El-Attar and Poschke, 2011; Georgarakos and Pasini, 2011 ). Notably, GSZ (2008) argue that as the perceived probability of being cheated increases, stock investment becomes less likely, whereas areas that 3 Only about 50 percent own stocks even after including indirect equity ownership through retirement accounts. ...
Article
While a rapidly growing body of research underscores the influence of social capital on financial decisions and economic developments, objective data-based measurements of social capital are lacking. We introduce average credit scores as an indicator of a community's social capital and present evidence that this measure is consistent with, but richer and more robust than, those used in the existing literature, such as electoral participation, blood donations, and survey-based measures. Merging unique proprietary credit score data with two nationwide representative household surveys, we show that households residing in communities with higher social capital are more likely to invest in stocks, even after controlling for a rich set of socioeconomic, preferential, neighborhood, and demographic characteristics. Notably, such a relationship is robustly observed only when social capital is measured using community average credit scores. Consistent with the notion that social capital and trust promote stock investment, we find the following: first, the association between average credit score and stock ownership is more pronounced among the lower educated; second, social capital levels of the county where one grew up appear to have a lasting influence on future stock investment; and third, investors who did not own stocks before have a greater chance of entering the stock market a few years after they relocate to higher-score communities.
... Guiso et al. (2004) also show that Italian families tend to invest more in the regions where blood donation rates are higher, the electoral participation is greater and people trust more their neighbours. Thus, other factors affecting the stock market participation are trust (Gambetta, 1998) and sociability: a high level of trust, together with the network a person belongs to, impact on the willingness to invest in the financial market (Guiso et al., 2008, Georgarakos, Pasini, 2011. On the contrary, the lack of trust and the fear of being cheated deter households from investing. ...
... Hong studied the impact of social interactions and peer effects on people's involvement in stock investment, and found that people who regularly participated in social activities can access to broader capital market information, with higher stock holdings [7] . Georgarakos and Pasini integrated the social intercourse and credibility into the residents' investment decisions, and there is a significantly positive correlation between the credibility and stock holdings that the higher the credibility of investors is, the more loosening the expectations for risk is, and therefore there are a higher proportion of risk assets [8] . Domestically , by analyzing the data of " Investor Behavior Survey " from Beijing Investment Advisory Centre of Aldo, Cong Wang (2006) concluded the impact of consumer expectations, credibility, social interaction, investor sentiment and other factors on residents' involvement in the stock market [9]. ...
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As an important part of culture, religion can influence people’s attitude about worth and wealth, thus their economical behavior and financial decisions. Based on CGSS2010 data, this paper analyzes the relationship between religion and people’s choice of financial assets. The empirical results of this paper show that, those who believe in religion are more willing to hold risk assets than those who do not believe in religion, including the stocks and funds, bonds, etc.
... Following Guiso et al. (2008) and El-Attar and Poschke (2011) show that trust level affects the household asset allocation between housing and risky financial assets in Spain. Georgarakos and Pasini (2011) separate trust from sociability in determining stock market participation. They show that these two factors both have distinct and sizeable positive effects on stock market participation in European countries, and sociability is likely to partly balance the discouragement effect on stockholding induced by low generalized trust level. ...
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Social interaction plays an important role in transmitting relevant information to potential investors. However, the informational role of social interaction might be affected by other information channels, which is to a large extent ignored in previous studies. Using a national representative household finance survey data covering more than 8000 Chinese households, we demonstrate that social interaction alone positively affects household stock market participation, but Internet access mitigates the influence of social interaction. In particular, among households with the access to Internet, sociable households in effect are associated with a 6 percentage-point decrease in the probability to participate in the stock market. This finding supports the substitution between Internet access and social interaction as information channels. Moreover, we also identify the social multiplier effect of social interaction: sociable households living in the communities with higher stock market participation rate are more likely to invest in stocks.
... The model therefore predicts that greater social interaction throughout society will tend to increase the rate of evolution of the population toward stock market participation. Consistent with this prediction, survey evidence from ten European countries indicates that household involvement in social activities increases stock market participation Georgarakos and Pasini (2009). There is also survey evidence consistent with an effect of differences in social interaction within society (Hong, Kubik, and Stein (2004)). ...
Article
Individual investors often invest actively and lose thereby. Social interaction seems to exacerbate this tendency. In the model here, senders' propensity to discuss their strategies' returns, and receivers' propensity to be converted, are increasing in sender return. The rate of conversion of investors to active investing is convex in sender return. Unconditionally, active strategies (high variance, skewness, and personal involvement) dominate the population unless the mean return penalty to active investing is too large. Thus, the model can explain overvaluation of 'active' asset characteristics even when investors have no inherent preference over them.
... Concerning economic activity, Georgarakos and Pasini (2011) find that higher levels of trust are positively associated with stock market participation. In particular, they show that the effect of trust is stronger for wealthier households in certain European countries where stock market participation is limited and average levels of trust are low. ...
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In the aftermath of the financial crisis, the ECB has experienced an unprecedented deterioration in the level of trust. This raises the question as to what factors determine trust in central banking. We use a unique cross-country dataset which includes a rich set of socioeconomic characteristics and supplement it with variables meant to reflect a country’s macroeconomic condition. We find that besides individual socio-economic characteristics, macroeconomic conditions play a crucial role in the trust-building process. Our results suggest that agents are boundedly rational in the trust-building process and that current ECB market operations may even be beneficial for trust in the ECB in the long-run.
... 217) " . Recent research has shown that lack of trust in the financial system and financial intermediaries reduces the probability to hold risky assets and pension plans ( Pasini and Georgarakos, 2009; Agnew et al., 2007). As expected, also in our case trust towards one's own advisor matters, as it increases the likelihood of delegation and reduces that of autonomous investment. ...
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The low level of financial literacy in many countries suggests that households are at risk of sub-optimal financial decisions. In this paper we assess to what extent financial advisors can substitute for the households' lack of financial knowledge, by analyzing the effect of investors' financial literacy on their decision about how much to rely on financial advisors. We model the strategic interaction between poorly informed investors and better informed advisors facing conflict of interests. We find that advisors reveal information only to the more knowledgeable investors, who anticipating that are more likely to consult advisors. Investors with lower financial literacy either invest by themselves (without any professional advice) or delegate their portfolio choice completely, suffering the agency costs of such decision. These results are confirmed empirically, where we investigate the effect of financial literacy on the demand for financial advice using the 2007 Unicredit Customers' Survey. Overall, our results suggest that non-independent advisors are not sufficient to alleviate the problem of low financial literacy.
... example, Ekinci, Kalemli-Ozcan and Sorensen (2007) argue that country wide differences in economic institutions are not sufficient to explain the limited financial integration among EU countries. Instead, they show that European regions with high levels of trust and confidence in various authorities and institutions are more financially integrated. Georgarakos and Pasini (2011) show that low prevailing trust in the region of residence can offer an explanation for the remarkably low stock market participation rates among the wealthy households living in certain European countries. Furthermore, according to Tabellini (2010) In our specifications we take into account a rich array of household demographics, region ...
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We examine the influence of social capital and various prevailing beliefs on household repayment behavior in Europe, after accounting for household-specific characteristics and country differences in institutions. Arrears are more common among households living in regions with dense corruption beliefs, low confidence in institutions and authorities, and a low fraction of religious people. Moreover, high stocks of social capital reduce the likelihood of arrears, net of the influence of various potentially relevant factors. Households in these communities face a higher hazard of losing standing in the group and access to the positive externalities of social capital.
... alized trust in one's banker have a large positive effect on the probability of stock market participation and on the share of an individual's wealth invested in stocks (conditional on participation). Likewise, Hong et al. (2004) and Brown et al. (2008) find that sociability and social interaction have a strong impact on the decision to buy stocks. Georgarakos and Pasini (2010) confirm the positive effects of both trust and sociability. ...
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We investigate the differences in economic attitudes and financial decisions between religious and non-religious households. Using Dutch survey data, we find that religious households consider themselves more trusting, and have a stronger bequest motive and a longer planning horizon. Furthermore, Catholics attach more importance to thrift and are more risk averse, while Protestants combine a more external locus of control with a greater sense of financial responsibility. Religious households are more likely to save. Catholic households invest less frequently in the stock market. Economic attitudes are particularly helpful in explaining the financial decisions of Catholic households. Copyright 2012 Oxford University Press 2011 All rights reserved, Oxford University Press.
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We set out in this study to determine whether individuals with higher levels of financial literacy are more likely to be active participants in the derivatives markets. Our empirical results, based upon an official National Survey undertaken by the Financial Supervisory Commission of Taiwan, reveal that even after controlling for stock market participation rates, financial literacy represents a significant benefit to individuals since it helps them to lower the entry barriers to purchasing complex derivatives products. We also find that household wealth, gender, residential location and diverse sources of information have significant effects on participation rates in the derivatives markets. Furthermore, when taking into consideration issues of accessibility or measurement error, the positive effects of financial literacy on derivatives market participation are found to remain largely unchanged.
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We investigate the linkages between cultural factors and financial exclusion using detailed data from the 2013 wave of the Panel Study of Income Dynamics (PSID). Controlling for a large number of demographic characteristics and background factors, we find that Catholics are more likely to be excluded from basic banking services. In contrast, Jewish and religiously unaffiliated individuals are more likely to participate in retirement plans and the stock market. More importantly, we obtain economically important effects of social participation on financial exclusion. In particular, we document that individuals exhibiting a pro-social religious behavior, proxied by charitable giving, are less likely to be financially excluded. This effect remains robust to the use of earlier waves of the PSID, as well as to alternative estimation techniques which account for endogeneity of charitable giving and unobserved households' heterogeneity. Our findings highlight the need for the development of initiatives which promote social participation as a means of combating financial exclusion.
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Individuals' economic attitudes are frequently observed to vary in a systematic manner with religious affiliation or religiosity. As a consequence, religion is also correlated with a range of financial-economic outcomes. Research has established the importance of religion at the macro-economic level, and has shown that the religious environment may affect the behavior of managers and institutional investors. Much less evidence exists on the role of religion in the financial decision-making process at the household level. Therefore, this chapter uses data from a well-recognized household survey to investigate the relationship among religious affiliation, economic attitudes, and saving and investment decisions in the Netherlands. The evidence shows that differences in economic beliefs and preferences can partially explain the higher propensity to save by all religious households and the lower investments in stocks by Catholic households.
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We study the complex relationship between financial literacy, retirement planning and trust in financial institutions, using data from the 2010 Bank of Italy Survey on Household Income and Wealth. The impact of financial literacy on retirement planning is a well-established issue in the existing empirical literature; our main contribution is proving that financial knowledge not only impacts retirement planning, but also the decisions of entering a private pension scheme (or devoting the severance pay to a private pension scheme). Adding the consideration of trust poses serious econometric concerns, since both financial literacy and trust in financial institutions are likely to be endogenous and the presence of two endogenous regressors renders the identification of causality very difficult. Our solution is to keep only financial literacy as endogenous and include in our models an exogenous regional indicator of social capital (similar to the one adopted by Guiso et al ., 2004), as a proxy for the level of trust between the counterparts of a financial contract in each geographical area. Our main findings show that trust has a positive influence on both the decisions to enter a private pension scheme or to devote the severance pay to a private pension scheme.
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Asset allocation and portfolio diversification decisions have important welfare and policy implications. This chapter reviews studies that examine three key aspects of financial investing: participation in stock markets, portfolio diversification, and trading behavior. Standard finance theory makes predictions about the optimal investment behavior of rational agents with reference to each of these three aspects. On the other hand, empirical studies document that observed behavior of investors largely deviates from theory predictions. The chapter also provides a discussion of empirical regularities that point to these deviations such as the limited stock market participation, the poor diversification and preference for domestic securities, and the contrast between excess trading activity of a few wealthy investors and considerable trading inertia exhibited by the majority of the population. These issues become increasingly topical as investors face a richer menu of complex financial instruments and gradually assume higher responsibility for retirement financing.
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The repeated episodes of financial crises, particularly the most recent global crisis, have led to a loss of confidence and trust in the financial system. As a result, calls have been made for the restoration of trust and reform of institutions in stock markets. Calls have also been made to redesign the financial system based on risk sharing principles, the operational essence of Islamic finance. As stock markets are the first best means of risk sharing, the strengthening of social capital in stock markets, particularly trust as the most important element of social capital, is therefore crucial for the redesign of the financial system. However, building social capital itself is as difficult to do as social capital is to define. It is precisely because of this challenge that proposals to develop social capital in stock market are meaningful. On this premise, we propose first, a contextualized definition of social capital in risk sharing and second, six broad recommendations and fourteen specific initiatives within a four-dimensional framework for the development of social capital to promote a trustworthy, ethical and efficient stock market. A web of multi-pronged initiatives that is mutually reinforcing is desired in this respect, considering the multifaceted dimensions of social capital and the various possible transmission channels by which social capital influences risk-sharing finance.
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Purpose – The purpose of this paper is to set forth seven broad recommendations and 15 specific initiatives within a four-dimensional framework for the development of social capital in Islamic finance, particularly the stock market, given its role as the first best means of risk sharing. Design/methodology/approach – The four-dimensional framework comprises dimensions of principle and value, trust-reinforcing regulation, investment opportunity and infrastructure, as well as reputational intermediaries. Findings – A web of multi-pronged initiatives that are mutually reinforcing is proposed considering the multifaceted dimensions of social capital and the various possible transmission channels by which social capital can influence the financial system. Practical implications – While empirical studies have demonstrated the importance of trust and ethics in financial development, the pressing issue remains how social capital, including trust and ethics, can be developed to achieve a trustworthy, ethical and efficient financial system. This paper attempts to address this concern. Originality/value – This paper provides a framework for building social capital in Islamic finance.
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Chapter
The Problem to be ExaminedThe Reciprocal Nature of the ProblemThe Pricing System with Liability for DamageThe Pricing System with No Liability for DamageThe Problem Illustrated AnewThe Cost of Market Transactions Taken into AccountThe Legal Delimitation of Rights and the Economic Problem
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The study of household finance is challenging because household behavior is difficult to measure, and households face constraints not captured by textbook models. Evidence on participation, diversification, and mortgage refinancing suggests that many households invest effectively, but a minority make significant mistakes. This minority appears to be poorer and less well educated than the majority of more successful investors. There is some evidence that households understand their own limitations and avoid financial strategies for which they feel unqualified. Some financial products involve a cross-subsidy from naive to sophisticated households, and this can inhibit welfare-improving financial innovation. Copyright 2006 by The American Finance Association.
Article
We propose that stock-market participation is influenced by social interaction. In our model, any given "social" investor finds the market more attractive when more of his peers participate. We test this theory using data from the Health and Retirement Study, and find that social households-those who interact with their neighbors, or attend church-are substantially more likely to invest in the market than non-social households, controlling for wealth, race, education, and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher. Copyright 2004 by The American Finance Association.