Investor Competence, Information, and Investment Activity

Abstract

According to Heath and Tversky (1991), people are more willing to bet on their own judgments in areas where they consider themselves more knowledgeable or competent. We analyze the competence effect in the context of individuals' choices in their own pension accounts. We find that individuals with a high own perceived competence regarding the new Swedish pension system are more likely to actively choose mutual funds in their own accounts, whereas individuals with a low perceived competence are less likely to make an active choice. We also find a significantly positive relationship between an individual's information processing and perceived competence, consistent with the notion that competence is enhanced information processing, and diminished by calling to attention information that is not available to the individual.

Keywords: Investor competence, Information, Individual behavior, Investment

JEL Classification: D80, E21, G11, G23