Title: Whom to Educate? Financial Fraud and Investor Awareness

Speaker: Assistant Professor Sunny Huang, Hong Kong University of Science and Technology

Time: April 19th 2017 15:00–16:15

Venue: Conference Room 106B, Zhonghui Building (College of Economics, JNU)

Abstract:

Financial fraud is a prevailing issue, especially in developing countries. We study how investors are exploited by too-high-to-be-true financial products using a model in which a fraction of investors are unaware of the possibility of financial fraud. Unaware investors purchase financial products that are inconsistent with the their risk attitudes, and their behaviors, in turn, provide incentive for firm to conduct financial fraud. Reducing the fraction of unaware investor induces firm to behave honestly, and financial fraud disappear if this fraction drops below a certain threshold.

With this insight, we conduct a field experiment in Shenzhen, China, which experimentally measure investor's risk attitude and the effect of an eye-opening financial education program. We find that, the efficacy of education program depends on investor's risk attitude, financial literacy measure, and demographic characteristics. The education program significantly reduces an investor's possibility of investing in financial frauds, especially for those who are risk-averse. Therefore, compared to assigning the education program randomly, targeting on risk averse investors will be more effective. Using the data from our experiment and survey, we conduct a counterfactual analysis to quantify this effect.