In this post, we provide an overview of the main findings of the latest Report from the Italian financial regulator, CONSOB, on Italian households’ financial choices.
The 2018 edition of CONSOB’s Report on Financial Investments of Italian Households (‘the Report’) presents evidence on the financial choices of a representative sample of 1,601 Italian retail financial decision makers.
There is an extensive literature suggesting that several individual inclinations may deeply affect financial behaviour. Understanding this may be key to enhancing the effectiveness of investor protection tools, such as the rules of conduct that intermediaries have to comply with when providing investment services (such as the suitability requirements in MiFID II and 2018 ESMA Guidelines) and to the design of financial education initiatives targeting behaviour, such as financial planning, saving and investing. In particular, as regards financial education, preliminary evidence gathered in the Report may be useful to innovate and, specifically, to complement the conventional delivery of educational contents with initiatives targeting individual’s traits and stimulating personal engagement, to the benefit of the recently launched National Strategy for Financial Education.
Distribution of selected personal traits among Italian financial decision makers
Personal engagement with financial planning and budgeting, inspection of information on financial products and comparison of alternative investment options may be related to individuals’ approaches to quantitative information and cognitive reasoning. The Report collects interviewees’ preferences for numerical information, finding that around 36% of respondents can be ranked as having a high consideration of the importance and usefulness of data and figures (Figure 1), whilst slightly more than 40% can be classified as highly inclined to engage in effortful thought (need for cognition; Figure 2).
Figure 1 – Preference for numerical information
Figures 1 and 2 report respondents’ opinion on the relevant statements (scale type: 5-point Likert, from 1 – ‘strongly disagree’ to 5 – ‘strongly agree’). ‘Agree’ includes ‘agree’ and ‘strongly agree’, while ‘disagree’ includes ‘disagree’ and ‘strongly disagree’.
Figure 2 – Need for cognition
Savvy financial behaviour may be also linked to self-efficacy, ie, confidence in one’s own ability to accomplish goals and to overcome potential difficulties, and self-control, ie, one’s own propensity to postpone present gratification for the benefit of future achievements, which most of the sample self-reported (Figures 3 and 4).
Figure 3 – Attitude towards self-efficacy
Figure 4 – Attitude towards self-control (restraint)
Optimism and generalised trust are also common to the majority of the households’ financial decision makers (Figure 5).
Figure 5 – Optimism and trust
Thinking about one’s own personal finances, however, seems to be painful for a significant percentage of Italian financial decision makers, as nearly 50% of the sample reports experiencing feelings of anxiousness at least to a ‘medium’ extent (Figure 6).
Figure 6 – Financial anxiety
Personal traits and financial knowledge
Italian households’ financial knowledge has historically been unsatisfactory. Empowering citizens in their economic decision-making process is therefore of paramount importance. To be effective, however, financial education programs need to rely on personal engagement in the improvement of one’s own financial competencies. In this respect, it is crucial to understand how individual traits interact with financial knowledge and personal motivation to raise financial literacy.
The Report shows that financial knowledge, both actual and perceived, is positively associated with all of the surveyed personal traits except for financial anxiety. Indeed, financial anxiety decreases among more literate individuals, as we find in a companion paper, on file with the authors and available upon request).
This evidence combines with analysis exploring individual intentions to enhance their financial knowledge within the framework of the theory of planned behaviour (‘TPB’). The TPB allows insights to be gained on the transmission channel between individual attitudes and behaviour by accounting for intentions, which are the precursors of behaviours themselves. According to the TPB, intentions depend on psychological constructs such as attitudes (ie, one’s own overall evaluation of the behaviour), social pressure (feeding into social norms and motivation) and behavioural control (ie, perception of one’s own ability to enact the behaviour). In turn, these psychological constructs are backed by background factors such as personality traits, other individual features (experience, education, age, gender and income) and information features (eg, knowledge and media). According to this framework, intervening on attitudes, perceived social pressure and feelings of control, as well as on their background factors (as long as it is viable), can boost intentions towards a specific behaviour.
Indeed, the Report shows that all the virtuous personal traits investigated in the survey correlate positively with attitudes and perceived control, while being associated negatively with perceived social pressure. The latter, in turn, is positively related to financial anxiety, which instead seems to play a negative role with respect to attitudes and perceived control. This preliminary evidence suggests a need for further investigation on the role of individual traits in triggering personal engagement in learning about finance.
Personal traits and financial behaviour
Personal traits also appear intertwined with financial behaviour, such as financial control and saving habits (Section 4 of the Report), investment choices, and demand for investment advice (Sections 5 and 6 of the Report, respectively).
As for financial control, Italian households are not yet widely used to engage in good practices of budgeting and planning. About 47% of interviewees have a budget, but less than one third take written notes of household expenses (Figure 7).
Figure 7 – Budgeting and monitoring expenses
Figures refer to the following questions: ‘Which of the following best describes your attitudes towards budget planning?’ and ‘Which of the following best describes your attitudes towards monitoring household expenses?’.
Moreover, less than one third of respondents assert that they have ever had a financial plan and checked its progress (Figure 8).
Figure 8 – Financial planning
Figures in the centre and on the right-hand side refer to the subsample of individuals reporting to have a financial plan.
Financial control is more frequent among individuals recording higher levels of financial knowledge and a higher self-reported inclination to numerical information and self-control; feelings of financial anxiety may instead be a deterrent. In addition, personal traits also turn out to be potentially relevant to the intention to engage in budgeting, as shown by the TPB analysis of the background factors underpinning the psychological constructs that trigger the intention.
Not surprisingly, saving—undertaken by less than 40% of the interviewees on a regular basis and by 36% of the respondents on an occasional basis (Figure 9)—is more likely among individuals used to financial control, as well as among wealthier and more literate respondents.
Figure 9 – Saving habits
Figure on the right-hand side refers to the subsample of respondents reporting to save.
Finally, the propensity to participate in financial markets and invest (more likely among individuals with higher financial knowledge)also seems to be positively correlated with trust, optimism, preference for numerical information and need for cognition as well as with tolerance to short-term losses; the opposite correlation holds for risk aversion and loss aversion. Interestingly, risk preferences are also found to be correlated with individual attitudes: risk aversion and loss aversion are more likely among financially anxious individuals, and less frequent among people with higher preference for numerical information and need for cognition. The opposite associations hold with respect to the tolerance to short term losses (Section 3 of the Report).
Nadia Linciano is the Head of the Economic Studies Unit and Monica Gentile and Paola Soccorso are researchers at the Economic Studies Unit at Commissione Nazionale per le Società e la Borsa (CONSOB). The opinions expressed in this post are the authors’ personal views and are in no way binding on CONSOB.