Financial Literacy, Ability, and Stock Market Participation

We study the role of financial literacy and ability, both cognitive and noncognitive,
in explaining stock market participation. We examine a comprehensive set of cognitive
and noncognitive measures of ability and a detailed financial-literacy measure using
data from the Health and Retirement Study. We find that both financial literacy and
a wide range of ability measures have an effect on stock market participation. We
decompose the effect of ability into direct and indirect effects that operate via financial
literacy. In addition, we address potential endogeneity concerns by exploiting information on genetic variation across individuals.