Rishika Pal

Date of Award

Spring 2024

Degree Name

Bachelor of Science (BS)

Advisor(s)

Mario DiFiore

Abstract

Lo’s Adaptive Market Hypothesis combined the well-known Efficient Market Hypothesis with behavioral finance to state that investors in the market are often rational but certain behaviors (overconfidence, overreaction, loss aversion, etc) cause market volatility (Lo, 2004). As the human species has continued to evolve, differences in learned behavior occurred to eventually became known as culture. Thus, if market movements are an extension of evolution, then how do the differences within culture impact investor behavior? This study explores this question through a literature review concentrated on culture, financial literacy, and behavioral finance as well as a qualitive research methodology with datasets from Hofstede’s Cultural Dimensions, S&P Global Financial Literacy Survey, the University of Michigan’s Health and Retirement Survey, and relevant international sister studies. After analysis, the data suggests that culture and financial literacy rates have an impact on investment behavior. More specifically, financial literacy and cultural dimensions such as power distance and individualism could indicate the level of participation within the capital markets. In countries with high financial literacy, low power distance, and high individualism, there is less reliance on superiors managing an individual’s finances. Thus, individuals are likely to have low risk avoidance and higher participation in the stock market. Meanwhile, countries with lower financial literacy rates, higher power distance, and lower individualism tended to have less participation in the stock market partially due to access and reliance on pension plans to manage individuals’ money on their behalf.

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