When more is less in financial decision-making: financial literacy magnifies framing effects

Abstract

In recent years, the financial world has become more complex and intricate. In this context, numeracy and, particularly, financial literacy, are seen as paramount in providing consumers with the knowledge and confidence required to take part in financial markets. Despite some indicative empirical findings, it is still to be ascertained how the two competences differentially contribute to the quality of decision-making in financial contexts. Furthermore, it is still unknown to what degree financial literacy and numeracy, taken as relevant mind-ware for financial decision-making, are effective in guarding against well-documented biases such as loss aversion and framing effects. This study aims to clarify these issues by employing an experimental task, conceived as an approximation to real-world decision-making involving the sale of shares. Our results suggest that numeracy and financial literacy affect decision-making differently in a pattern that, in part, runs counter to conventional economic theory. The data indicate that numeracy promotes a pattern of choices closer to economic rationality, while financial literacy can prove counterproductive and may amplify cognitive biases, namely framing effects and loss aversion. The outcomes are interpreted in light of dual-process theories, and the political implications discussed.

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Notes

  1. 1.

    In the present paper, we will take maximization of the excepted value as the normatively correct strategy, mostly due to its straightforward calculation and interpretation. For the most part, our conclusions would be unchanged if Expected Utility was considered instead (with the added issue that a utility function would have to be assumed), as the latter should be a monotonously increasing function of the former (Von Neumann & Morgenstern, 1947).

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Funding

This work was supported by the Portuguese Foundation for Science and Technology (FCT) through a Doctoral Fellowship (SFRH/BD/99484/2014) awarded to the first author.

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Correspondence to Vânia Moreira Costa.

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Moreira Costa, V., De Sá Teixeira, N.A., Cordeiro Santos, A. et al. When more is less in financial decision-making: financial literacy magnifies framing effects. Psychological Research (2020). https://doi.org/10.1007/s00426-020-01372-7

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