Human capital accumulation and investment behaviour

Limited use of financial markets is associated with financial distress later in life. Such limited use may be the result of choice, or, more likely, it may be due to some impediment. Limited participation in financial markets may be related to transaction costs or high risk aversion, but has also been found to be related to a low level of financial literacy. It has also been shown that stock holdings are much less common among the less financially literate. Although no direct measure of financial literacy is as yet available in SHARE, we have information on education-related variables that are well known to correlate with financial literacy. In particular, the third wave of SHARE records information not only on educational attainment, but also on self-assessed mathematical ability while at school and on access to books at age ten. Crucially, we also know when an individual first entered risky financial markets, by investing in stocks, mutual funds, individual retirement plans or life insurance policies. This paper demonstrates that making correct use of financial instruments plays an important role in securing a good standard of living in old age. People who failed to invest in equity over the last century missed out on spectacular returns, and are now more likely to be in financial hardship. Our findings that formal education, mathematical skills and family background all play a role in explaining participation to financial markets comforts the assumption that financial behavior is affected by levels of human capital. The evidence that in some countries both education and financial market participation is lower for women is of particular interest, given the momentous increase in educational attainment by young females over the last few decades. All this suggests that greater financial literacy constitutes an achievable aim for welfare systems.JRC.DG.G.3-Econometrics and applied statistic