Financial literacy, the risk-as-feelings hypothesis, and passive income generation

Abstract

Low household wealth has been associated with the lack of participation in risky financial markets. To improve our understanding of how households decide to participate in financial markets, it is important to investigate how financial literacy heterogeneity among heads influences households' risk attitude and capacity and the propensity to invest in various financial markets. Utilizing the U.S. 2016 survey of consumer finances, this article tests the effect of the head's financial literacy on the household's risk attitude and capacity and also examines whether the household's risk tolerance leads to a greater impact of the head's financial literacy on the likelihood of investing in high-yielding markets. Our key finding is that the head's financial literacy improves the household's risk tolerance, thereby nudging the household to invest in high-yielding markets. The article identifies improving the head's financial literacy as an efficacious strategy for increasing household wealth via greater participation in higher-yielding financial markets.