Financial Literacy and Generation Y: Relationships Between Instruction Level and Financial Choices

Abstract

The heuristics used by investors in their process of decision-making tend to find short cuts and simplified roads to complicated answers, often unintentionally forgetting to be rational in contrast with market efficiency assumptions. We conducted a survey on about 250 young people (18–27 years old) concerning their financial literacy and economic choices, given an education level which is predominantly very high (73% enrolled in a bachelor degree, 80% took part to at least some basic finance or economics courses). More precisely, the survey was designed to study the influence of financial-economic literacy on the flaws occurring in financial decisions of young people (the so called generation Y): biases, overconfidence, framing. The results of the survey give an insight into the behaviour of a new and educated generation in typical economic decision frameworks, which could be a useful tool for stakeholders. In fact, being aware of the psychological component of the financial decision is a key factor to better understand and manage risk.

Authors are listed in alphabetical order. All authors contributed equally to this work, they discussed the results and implications and commented on the manuscript at all stages.

6 Appendix: The Questionnaire

We report below the detailed questions and the possible answers in the survey. Raw data can be requested to the corresponding authors.

 

Q1:

If choosing between an investment in government bonds and shares of private companies, one can say that bonds are riskier. (True, False, Don’t know)

Q1.1:

How sure are you that your previous answer is correct? (Less than 50, 50–80%, More than 80%)

Q2:

The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows. (True, False, Don’t know)

Q2.1:

How sure are you that your previous answer is correct? (Less than 50, 50–80%, More than 80%)

Q3:

A leverage ratio bigger than 2.5 is a clear sign that the company is financially healthy and is a good investment opportunity. (True, False, Don’t know)

Q3.1:

How sure are you that your previous answer is correct? (Less than 50, 50–80%, More than 80%)

Q4:

Do you think your knowledge of basic finance is above average? (Yes, No)

Q5:

Imagine you have a friend who needs your opinion on investing his saved 10,000$ in a combination of these alternatives for the next 12 months. Historically, bonds are considered less risky investments, whereas all the investments in stocks (national and foreign) are riskier but on average they can guarantee higher earnings. Suggest your friend (in terms of percentages) how to construct the portfolio. You even can put 100% in one box, if you feel it appropriate. The total of the investments must add up to 100%. (Bond investment—steady but pretty low income for savings, Equity investment—shares with greater volatility than bonds but higher returns, Flexible funds—a mix of foreign stocks and bonds, a little riskier than equity but higher returns)

Q5-2nd type of survey:

Imagine you saved 10,000$. You have to invest in a combination of these alternatives for the next 12 months. Historically, bonds are considered less risky investments, whereas all the investments in stocks (national and foreign) are riskier but on average they can guarantee higher earnings. Construct your portfolio (in terms of percentages). You even can put 100% in one box, if you feel it appropriate. The total of the investments must add up to 100%.

Q6:

Imagine you have to take the same decision but for yourself now. You have 10,000$ to invest in the same combination of alternatives for the next 12 months in a portfolio. The total of the investments must add up to 100%. (Bond investment—steady but pretty low income for savings, Equity investment—shares with greater volatility than bonds but higher returns, Flexible funds—a mix of foreign stocks and bonds, a little riskier than equity but higher returns)

Q6-2nd type of survey:

Now imagine you have to give an advise to your friend who also has 10,000$ saved and you have to help him construct his portfolio for the next 12 months with the same alternatives. The total of the investments must add up to 100%.

Q7:

Imagine you have a fried, who is 25 years old, does not have any debt and just finished his MBA. He will inherit shortly 100,000$ from his deceased aunt. He is asking you an advice on forming a portfolio in which to invest the inheritance. Based on the graph below, would you recommend your friend to invest in a portfolio which has this trend? (Yes, No, Don’t know)¹

Q8:

Which of the following statements comes closest to the amount of financial risk that you would be willing to take when you will save or make investments? (Take above average financial risks expecting to earn above average returns, Take average financial risks expecting to earn average returns, Not willing to take any financial risks)

Q10:

Could you indicate your gender? (Female, Male)

Q11:

Could you indicate your age? (18–27, 28–36, More than 36)

Q12:

Which is your nationality? (open answer)

Q13:

Which is your level of education (past or currently enrolled)? (High School, Bachelor Degree, Master Degree, Ph.D.)

Q14:

Have you studied Finance or Economics courses in bachelor or in a higher degree? (Yes, No)