Who lost the most? Financial Literacy, Cognitive Abilities, and the Financial Crisis

This project set out to investigate in what way and to what extent the 2007/2008 financial crisis impacted private households, as well as to analyze how the crisis influenced their decision-making behavior. In particular, the following questions were posed: (1) Do persons with a lower level of financial literacy and lower cognitive abilities suffer crisis-related financial losses more frequently? (2) Are persons with a lower level of financial literacy and lower cognitive abilities impacted more in cases where losses are expressed as a percentage of assets? (3) Do persons with a lower level of financial literacy and lower cognitive abilities tend to realize their losses by selling? The survey based on SAVE data, a representative panel of German households (see project 4.4.), showed that persons with a lower level of financial literacy invested less often in the stock market and therefore less often reported crisis-related losses. Nevertheless, the probability of selling assets that had fallen in value was greater in the case of financially less literate persons. The reactive behavior of persons with low financial literacy levels could have substantial long-range consequences, particularly with a view to the increasing demands on personal responsibility in old-age provision. The project was conducted in collaboration with Michael Ziegelmeyer (former member of MEA, University of Mannheim; now with the Banque Centrale du Luxembourg). The paper has been accepted for publication in the Review of Finance in November 2013.