Determinants of Financial Literacy: The Role of Behavioral Biases, Experience, and Sociodemographic Factors

Cristiana Cerqueira Leal, Maria Helena Pereira

Abstract


This paper examines the determinants of financial literacy among Portuguese individuals, with particular emphasis on the role of behavioral biases. Using survey data from 1,850 respondents, we investigate how cognitive abilities, experience, and behavioral traits such as overconfidence and loss aversion influence different measures of financial literacy. Several probit and ordered probit models are estimated to assess the relationships between these variables and financial literacy outcomes. The findings reveal that financial literacy is positively associated with investment experience and with the relative weight of securities in individual wealth, suggesting that knowledge grows alongside exposure to financial practices. Cognitive reflection also shows a significant positive association with financial literacy. In contrast, both overconfidence and loss aversion negatively affect financial literacy levels, highlighting the detrimental role of these specific behavioral biases. Additionally, we find that financial literacy is higher among men, wealthier individuals, and those living in metropolitan areas. By testing alternative measures of financial literacy, we find that the magnitude and significance of determinants vary depending on the definition adopted. These results show the importance of considering multidimensional approaches when assessing financial literacy and designing financial education policies.

Keywords


Financial Literacy; Behavioral Biases; Overconfidence, Loss Aversion, Cognitive Reflection

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References


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Portuguese Journal of Finance, Management and Accounting

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