Ruhr Economic Papers

Ruhr Economic Papers #656

Naïve Advice in Financial Decision Making: Hidden Costs of a Free Offer

by Julia Sprenger

RUB, 10/2016, 39 S./p., 8 Euro, ISBN 978-3-86788-762-5 DOI: 10.4419/86788762

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Abstract

The current study examines individual decision making in the field of personal finance. A laboratory experiment investigates the way naïve advice influences the decisionmaking process. When advice is offered on demand, participants prefer expert over naïve advice. Although naïve advice is only half the price of expert advice, demand for naïve advice is negligible. When naïve advice is given unsolicited, however, it has nevertheless a strong impact on the decision process by lowering engagement in information acquisition and promoting a passive adoption of the recommended option. While high levels of financial literacy buffer this effect, issuing a warning does not. In case compliance with naïve advice leads to a low decision quality and the saving in information acquisition costs does not make up for this effect, the free offer of naïve advice produces financial losses. This can be interpreted as hidden costs of free naïve advice resulting from a switch in information strategy. People with low financial literacy are most vulnerable to this effect.

JEL-Classification: C91, G02, D83

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

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