We study how investors’ educational path and characteristics affect market participation, performance and risk taking in the stock market. To investigate such effects, we use educational performance measured by standardized exams and the type and specialty of a university degree obtained. The data covers one complete business cycle and includes detailed transactions and performance on the national stock exchange for all Estonian individual investors along with their past educational records from a national registry. The main contribution of the paper is a substantial step forward in determining how education and mental abilities influence stock market participation, risk taking and performance. We offer strong evidences that people with higher mental abilities are more likely to participate in the stock market and investors also outsmart other people in every field. Controlling for trading style, wealth, experience and a variety of demographic and educational characteristics, we provide empirical evidence that investors with overall high intellectual ability, as well as investors holding higher university degrees or degrees in certain fields, outperform market and achieve higher risk-adjusted returns. Investors holding a master’s or doctoral degrees are more risk averse and those holding a university degree in economics or finance are more risk seeking.
Keywords: behavioral finance, stock market participation, risk-adjusted performance, portfolio risk, educational characteristics, individual investors
JEL classification: G02, G11, I22, J24
