Household Financial Information Acquisition and Portfolio Choice

Luigi Guiso, Università di Sassari, Ente Einaudi & CEPR
Tullio Jappelli, Università di Salerno, CSEF & CEPR

Investors have strong incentives to acquire financial information. Informed investors can make better financial decisions and thus be able to attain a better risk-return combination and higher than average final wealth. But acquiring financial information is costly, either because it may entail monetary costs or because it is time intensive. Thus, in deciding how much information to collect investors will balance benefits and costs. This study analyzes the determinants of financial information and provides evidence on the effects of financial information collection on portfolio decisions by individuals investors. Consistent with what theoretical models predict, wealthier individuals, those with a preference for risk and those with lower costs of acquiring information spend more resources to accumulate financial information. Those who invest more in information collection trade more frequently and information leads them to acquire more risky assets. They also report to be more knowledgably of financial assets and more likely to participate in hypothetical financial investment decisions. But financial information collection crowds investment in mutual funds and results in less diversified portfolios.

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