- Original authors / creators
- Shulin Xu; Zhen Yang; Syed Tauseef Ali; Yunfeng Li; Jingwen Cui
- Original publication
- Frontiers in Psychology · Frontiers Media SA · 2022-06-20
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- CC BY 4.0
Copyright © 2022 Xu, Yang, Ali, Li and Cui.
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- Adjacent research, not a directly sampled family-office study. Applicability to a family office requires separate assessment. Attention is a scarce cognitive resource, and people pay attention to specific things at the expense of paying less attention to other things (Kahneman and Tversky, 1973). Limited attention will influence a financial anomaly when investors collect and process information to make decisions (Falkinger, 2008). Aboody et al. (2009) and Wang and Song (2022) also investigated how attention influences asset price dynamics via investors’ underreaction and overreaction to information. For individual investors, time and energy constraints limit the amount of information they can obtain and analyze, thus causing difficulty for them to consider all aspects when making decisions (Falkinger, 2008). Considering the unequal consequences of losses and gains on investors’ utility levels, investors tend to overreact to risk information and overestimate risk continuity (Wang and Song, 2022). Studies have also found that individual investors rely more on the information that attracts their attention when making investment decisions and ignore the information that is useful but difficult to notice, thus leading to biased decisions (Choi and Choi, 2019). Prior studies have also shown that media coverage may influence individuals’ limited attention and reaction to specific events (Barber and Odean, 2008; Aboody et al., 2009; Białowolski, 2019) and their ability to process information. Therefore, when the news media focus on certain firms or portfolios, investors will focus on those stocks that grab their attention. Economics is concerned with allocating a scarce resource among a variety of possibilities. The ability to pick among the options requires knowledge of the options available. The lack of information may lead to consumer ignorance with regard to possible alternatives. For example, modern consumers may receive a lot of mail with advertisements in the daytime, jostling for his or her attention. As Simon (1957) mentioned, having a lot of information turns attention into a scarce economic factor; information “consumes the attention of its recipients.” Behavior is influenced by perception regardless of the subject’s rationality. Humans have a limited capacity for processing signals, and only impulses that are sufficiently intense are perceived. In this regard, individuals tend to focus on the most prominent areas, such as the first results returned by a search engine (Sconti, 2022). However, in financial decisions, more types of assets should be taken into account. Individuals with higher financial literacy could actively search and process relative information (e.g., realizing economic survey data) more rationally, thus making their financial behaviors diversified and dynamic. We argue that limited attention serves as an underlying mechanism in the association between financial literacy and households’ financial behavior. In fact, some financial information (e.g., earnings announcements) is relatively less accessible to the public due to information asymmetry and high processing costs relative to media coverage (Oliver et al., 2022). For example, rural households with lower financial literacy may not actively participate in the financial market fairly and enjoy the benefits of financial services (Mahendru, 2020; Xu et al., 2021). In this regard, interpreting some information in daily-time financial decisions becomes challenging for individuals who lack relative financial knowledge. We also present our conception framework in Figure 1. We reviewed the respondents’ attention to economic and financial information in the CHFS questionnaire (Zou and Deng, 2019). Limited attention was a dummy variable assigned to 1 if respondents were very concerned about economic and financial information, otherwise 0 to general, less concerned, and never concerned. If respondents possessed a certain level of financial literacy, they would pay more attention to financial information and understand the financial market and financial products. Resultantly, their financial decisions would be more rational and optimized. Table 5 reports the regression results of the current, long-term, and dynamic effects of financial literacy on residents’ limited attention (Xu et al., 2021). In Model 1, the marginal effect of FL (b = 0.0704) was positive and significant at the 1% level (Wiersema and Bowen, 2009), thus indicating that the higher the financial literacy of residents is, the more likely they are concerned about economic and financial information (i.e., LA = 1) in the current. In Model 2, the marginal effect of FL (b = 0.0383) was positive and significant at the 1% level, thus indicating that the higher the level of financial literacy is, the more likely they are concerned about economic and financial information (i.e., LA = 1) in the long term. In Model 3, the marginal effect of FL (b = 0.0453) was positive and significant at the 1% level, thus indicating that financial literacy is helpful to improve the residents’ limited attention (i.e., dynamic effect). Residents with higher levels of financial literacy may do well in searching, analyzing, and processing financial and economic information and gradually enhance their limited attention. In addition, financial literacy and limited attention may have reverse causality and lead to endogeneity problems. Residents’ financial literacy may be affected by their usual attention to economic and financial-related information (Tang et al., 2021). Nevertheless, we opted for the average level of financial literacy of people living in the same village (community) other than the participants as the instrumental variable (IV) of the respondents’ financial literacy and the IV-2SLS method to estimate our model (Semadeni et al., 2014; Hill et al., 2020). The results of IV-2SLS are listed in columns (4–6) in Table 5. We can find that after dealing with endogenous problems, the current, long-term, and dynamic effects of financial literacy on limited attention are still positive and significant, which indicates that no reverse causality was observed between the financial literacy and limited attention of residents. Table 6 reports the regression results of the current, long-term, and dynamic effects of residents’ limited attention on financial behaviors (Xu et al., 2021). In panel A, LA refers to respondents’ attention to economic and financial information in 2015, whereas financial behaviors (including BA, SM, VM, SMI, CHI, PP, and CC) refer to their involvement in some financial products in 2015. We found that residents’ limited attention has a positive association with these financial behaviors (e.g., owning commercial bank accounts, participation in stock markets and risk investment, commercial insurance, pension plans, and holding credit cards) except social medical insurance in the current. As we know, social medical insurance is a type of compulsory service in most cities. Thus, the relationship between limited attention and social medical insurance is not significant. In panel B, LA refers to respondents’ attention to economic and financial information in 2015, whereas Financial behavior refers to their involvement in some financial products in 2017. We found that residents’ limited attention has a positive association with these financial behaviors except social medical insurance in the long term. In panel C, LA refers to changes in respondents’ concerns about economic and financial information between 2015 and 2017. We found that limited attention helps to increase residents’ acceptance of financial products and participation in financial markets. This result shows that the limited attention of residents can significantly and positively improve the decision-making of residents’ financial behavior. Residents pay much attention to economic and financial information. Hence, they can learn more about financial products and policy dynamics to make more appropriate and reasonable financial behavior decisions. Similarly, an endogenous relationship may also exist between residents’ limited attention and financial behavior. On the one hand, as residents pay increased attention to economic and financial-related information, their understanding of financial products, financial services, and financial markets will become clearer, thus facilitating them to make corresponding financial behavior decisions. On the other hand, given the increase in financial behavior decision-making, residents may select economic and financial information that is more related to their financial behavior to improve their financial behavior further. We selected the average limited attention level of people living outside the same village (community) as an instrumental variable (IV) for the respondents’ limited attention and employed the IV-2SLS method to estimate our model (Semadeni et al., 2014; Hill et al., 2020). The results of IV-2SLS are listed in Table 7. After dealing with endogenous problems, the current, long-term, and dynamic effects of residents’ limited attention on financial behavior are still positive and significant. This result is consistent with the estimates in Table 6, with only a small change in the marginal effect coefficient of limited attention. The results in Table 7 show that the limited attention of residents still has a significant impact on financial behavior after controlling for endogenous problems. Can limited attention act as an underlying behavioral mechanism through which financial literacy influences financial behaviors in the long term? In the previous two sections, we analyzed the impact of financial literacy on limited attention and the impact of limited attention on financial behavior. In fact, the analysis of these two parts is the mediation effect model. By combining the estimation results in Tables 5, 6, we find that financial literacy has current, long-term, and dynamic effects on residents’ limited attention. Moreover, limited attention has current and long-term effects on other financial behaviors except for social medical insurance. Financial behaviors (such as having a business bank account; participating in the stock market and venture capital; having social health insurance, commercial insurance, and pension plans; and holding a credit card) have dynamic effects. The results show that the impact of financial literacy on financial behavior is mainly achieved through the channel that affects residents’ limited attention. Interestingly, the limited attention to the current and long-term effects on social health insurance is insignificant. At the same time, financial literacy has no significant effect on social medical insurance’s long-term and dynamic effects. However, improving residents’ limited attention can improve residents’ social medical insurance decision-making. It further illustrates that the impact of financial literacy on social health insurance can be channeled through raising limited attention from residents.
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