Heterogeneous Relationship between Financial Literacy and Fund Investment Behaviors: Evidence from South Korea during the Financial Crisis

The importance of financial knowledge on efficient investment behaviors is well known. However, few studies have examined the relationship between financial literacy and investment behaviors under different economic situations. Using the 2007-2016 Fund Investors Survey from South Korea, we investigate the heterogeneous effects of financial literacy on individual investment decisions during and after the 2008 financial crisis. While differentiating objective and subjective financial knowledge, we find that only subjective knowledge is positively related to participation in financial markets and negatively related to fund exit decisions during the financial crisis (2007-2008). However, in the post-crisis period (2009-2016), both subjective and objective financial knowledge affect fund investment behaviors. We further examine these results through a knowledge calibration mechanism. We present suggestive evidence that the effect of subjective knowledge during the financial crisis is not driven by overconfident investors whose subjective knowledge level deviates from objective knowledge but by the group whose subjective and objective knowledge are highly calibrated.