The Pleasant Yield of Financial Illiteracy

Latest SCF 2016 wave shows that 57% of US households exhibit signs of financial illiteracy, a phenomenon even among college degree holders. Despite the previous findings about mistakes associated by financial illiterates, our findings portrays a picture in which financial illiterates households actually follow the standard financial theory. Specifically, financial illiterates report that they are aware of their lack of financial knowledge, and thus they bear less financial risk and allocate less money in risky assets, and constructively less overconfident (trade less frequently). Our findings enhance our understanding of the women and minorities unique portfolios, who exhibit highest level of illiteracy. Collectively, financial illiterates’ households adopt a portfolio choice strategy that is fully rational.