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The impact of cognitive skills on investment decisions. An empirical assessment and policy suggestions

Author

Listed:
  • Lorenzo Esposito

    (Dipartimento di Politica Economica, DISCE, Università Cattolica del Sacro Cuore – Banca d'Italia, Milano)

  • Lorenzo Marrese

    (DISCE, Università Cattolica del Sacro Cuore)

Abstract
Results of behavioral economics pose a strong challenge to mainstream finance theory conclusions. We discuss, theoretically and empirically, the connections of cognitive skills, biases and financial decisions using the Cognitive Reflection Test (Frederick, 2005). In particular, we have chosen overconfidence, risk aversion, bandwagon effect, time preference and money illusion, among the biases most discussed in the literature. The experiment we conducted confirmed a role of the cognitive skills in determining the decision mechanism of the investor although not neatly, especially for more complex biases, such as money illusion. Finally, we expose policy alternatives, focusing on the role of financial education to tackle cognitive biases in finance and monetary policy.

Suggested Citation

  • Lorenzo Esposito & Lorenzo Marrese, 2021. "The impact of cognitive skills on investment decisions. An empirical assessment and policy suggestions," DISCE - Quaderni del Dipartimento di Politica Economica dipe0019, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    • Handle: RePEc:ctc:serie5:dipe0019
    as

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    File URL: http://dipartimenti.unicatt.it/politica-economica-DIPE0019.pdf
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    More about this item

    Keywords

    cognitive biases; financial education; behavioral economics; CRT;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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