Down or Out: Assessing the Welfare Costs of Household Investment Mistakes
Abstract
This paper investigates the efficiency of household investment decisions using comprehensive disaggregated Swedish data. We consider two main sources of inefficiency: underdiversification (“down”) and nonparticipation in risky asset markets (“out”). While a few households are very poorly diversified, most Swedish households outperform the Sharpe ratio of their domestic stock index through international diversification. Financially sophisticated households invest more efficiently but also more aggressively, and overall they incur higher return losses from underdiversification. The return cost of nonparticipation is smaller by almost one‐half when we take account of the fact that nonparticipants would likely be inefficient investors.
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Highly literate investors tend to manage their risks significantly better than low literate individuals.
“Moreover, a number of studies has documented a positive link between financial literacy and portfolio diversification: highly literate investors tend to manage their risks significantly better than the group of low literate individuals (e.g., Calvet et al. 2007;Goetzmann and Kumar 2008;Guiso and Jappelli 2008;von Gaudecker 2015;Clark et al. 2015).”
From Financial literacy, financial advice, and financial behavior (2017) · cites this paper as Calvet et al. 2007
Cites
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The Economic Importance of Financial Literacy: Theory and Evidence
Lusardi, A., & Mitchell, O. S. (2014) · Journal of Economic Literature · doi:10.1257/jel.52.1.5 · Cited by 4,698 · see citing works
Financial literacy and stock market participation
van Rooij, M., Lusardi, A., & Alessie, R. (2011) · Journal of Financial Economics · doi:10.1016/j.jfineco.2011.03.006 · Cited by 3,554 · see citing works
Optimal Financial Knowledge and Wealth Inequality
Lusardi, A., Michaud, P.-C., & Mitchell, O. S. (2017) · Journal of Political Economy · doi:10.1086/690950 · Cited by 690 · see citing works
Financial literacy, financial advice, and financial behavior
Stolper, O. A., & Walter, A. (2017) · Journal of Business Economics · doi:10.1007/s11573-017-0853-9 · Cited by 471 · see citing works
“…link between financial literacy and portfolio diversification: highly literate investors tend to manage their risks significantly better than the group of low literate individuals (e.g., Calvet et al. 2007; Goetzmann and Kumar 2008; Guiso and Jappelli 2008; von Gaudecker 2015; Clark et al. 2015).”
InfluentialInternational Comparative Household Finance
Badarinza, C., Campbell, J. Y., & Ramadorai, T. (2016) · Annual Review of Economics · doi:10.1146/annurev-economics-080315-015425 · Cited by 218 · see citing works
Self-citation
- Authors
- Calvet, L. E., Campbell, J. Y., & Sodini, P.
- Affiliations
- National Bureau of Economic Research (US)
- Swedish National Bank (SE)
- ORCID
- Calvet, Laurent E.
- Venue
- Journal of Political Economy
- Publisher
- University of Chicago Press
- Published
- 2007-10
- Volume
- 115
- Issue
- 5
- Pages
- 707-747
- ISSN
- 0022-3808 (ISSN-L)
- 1537-534X
- OpenAlex
- W3123974814
- Cited by
- 992
- References
- 3
- Citations by year
- 2026: 46 · 2025: 49 · 2024: 88 · 2023: 64 · 2022: 75 · 2021: 64 · 2020: 55 · 2019: 37 · 2018: 68 · 2017: 59 · 2016: 40 · 2015: 50 · 2014: 59 · 2013: 42 · 2012: 35
- FWCI
- 110.82
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Journal of Political Economy (publishedVersion)
- HAL (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy and Behavior
- Keywords
- under-diversification, international diversification, welfare costs, financial sophistication, risk-taking, return loss, Swedish households
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