Ruhr Economic Papers

Ruhr Economic Papers #634

Financial Literacy – A Barrier to Seek Financial Advice but not a Shield Against Following it

by Julia Sprenger

RUB, 08/2016, 40 S./p., 8 Euro, ISBN 978-3-86788-738-0 DOI: 10.4419/86788738

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Abstract

The current study examines individual decision making in the field of personal finance. How do people arrive at a financial decision? A laboratory experiment investigates the way external information is integrated into the decision-making process. Financial literacy shows to lower demand for financial advice but it does not immunize against sunk cost fallacies: High financial literate subjects are not less likely to follow financial advice than less literate subjects, even when the quality of advice is moderate. Overconfidence biases the perceived need for information. Both results point to difficulties in making an informed choice.

JEL-Classification: C91, G02, D83

Keywords: Financial literacy; overconfidence; financial decision making; experiment; advice

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