The Relationship between Financial Literacy Misestimation and Misplacement from the Perspective of Inverse Differential Information and Stock Market Participation

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

This is an interesting and valuable manuscript, which helps scholars to understand the Korean financial market. However, the following modifications should be considered before publication.

(1) The introduction of the manuscript is too simple to reveal the research value and literature progress in this field.

(2) The picture of the manuscript is almost unreadable. It is difficult for me to get any valuable information from the picture. Authors are advised to provide higher definition pictures.

(3) Is the research data of this article in 2018? Why not use the latest research data. In recent years, the stock markets of several countries in East Asia seem to have fluctuated violently. I prefer to see the latest research data in recent years.

(4) It seems that the research results of this paper are only applicable to South Korea? It is suggested that the author discuss the generalization of the research results in this paper. Or emphasize in the title, abstract and conclusion that the research results of this paper are only applicable to South Korea.

(5) The abstract of the manuscript seems too simple, which does not reveal the research results and research value of this paper.

(6) Has the author considered the relevance of the variables mentioned in the manuscript? Such as age, education level and income. According to my understanding of South Korea, young people in South Korea are generally highly educated, and their income is not ideal. In other words, the control variables in this paper seem to be invalid, because the variables may not be independent.

(7) The manuscript does not seem to directly explain its novelty and literature contribution, nor does it compare with the existing research results. I think that if the author compares with the existing research results, he or she will soon find that the research results of this manuscript seem to be only applicable to South Korea. In addition, the author will get more exciting conclusions.

Author Response

Please see the attached file.

Author Response File: Author Response.pdf

Reviewer 2 Report

Comments and Suggestions for Authors

The research delves into the issues of misestimation and misplacement in terms of overconfidence bias. The authors propose the inverse differential information theory, as opposed to the differential information theory, and prove it statistically based on obtained results from the survey performed in South Korea. The results of the survey demonstrate that the theory can be applied in the field of people's financial literacy.

The paper is very engaging, relevant, and innovative. It reads with great interest, though there are some sophisticated terminologies, and thus, many places need to be read several times in order to catch the idea. All the required calculations are presented in tables and accompanied by detailed descriptions. The obtained results justify conclusions. The research is clearly multidisciplinary, combining elements of psychology, behavioural finance, and investment. Even if, after reading the article, for me personally the older theory (differential information theory) seems to be more justified and natural, the new theory of inverse differential information is also worth to be presented to the scientific community. This could lead to a profound scientific discussion and experiments with various datasets in different periods and countries, aiming to gather more evidence either for or against it. Inevitably, the science would greatly benefit from it.

There are some minor improvements that could be made:

-        To check carefully all the estimations. For example, in Table 5, at „weak overplacement“ the predicted score is 3.34, and the actual score is 3.90 (actual happens to be higher than predicted; thus, intuitively, it is not actually an overplacement). I understand that it could happen because the mean value is estimated, but it should be checked anyway.

-        Even if I haven‘t noticed any obvious grammar mistakes in the text, some sentences are long or have a lot of specific terminology, so it could be simplified where possible.

-        The references are rather old. The authors should consider adding some new ones – maybe some new theories or experimental proofs have appeared in this field or some varieties of the already known differential information theory, which can impact the treatment of the results of the presented research.

-        The survey has been performed in 2018, which is quite a long time ago. Thus, it did not take into account the pandemic and geopolitical issues that also impact the financial markets and people’s psychology. It is recommended to present the limitations of the research, along with future research directions.

-        At the end of Materials and Methods section, it should be briefly outlined, how the obtained survey results will be further analysed (i.e. regression analysis and its types).

Overall, the paper is of good merit, and I wish the authors great success in their future research.

Author Response

Please see the attached file.

Author Response File: Author Response.pdf

Reviewer 3 Report

Comments and Suggestions for Authors

Your paper is well done and shows significant work. I've looked at the paper carefully and with time applied. Here are some major items that come to mind in the paper, please see them as an opportunity to make it better and not as a critique:

1. Inverse Differential Information Theory:

   - Your paper mentions that this theory is an integrated and parsimonious theory opposing Moore and Healy's differential information theory. However, there is some inconsistency in how the theory is presented and its implications on misestimation and misplacement, leading to variable correlation magnitudes.

Table 4:    - Correlations between the interaction term and financial literacy variables show unexpected high correlations with misestimation across all groups, which might suggest a calculation or reporting error.

2. Operational Definitions:

   - The definitions of terms such as "overplacement," "underplacement," "strong overplacement," and "strong under-placement" are somewhat inconsistently applied throughout the paper. For instance, the definitions in Table 2 do not match the narrative descriptions.

3. Statistical Analysis:

  Table 7:

   - The ratio of stock participation experience for the "actual score group" and "age group" do not sum correctly to 1, indicating possible miscalculation or misreporting.

- For the "Experience of family member" variable:      - "Yes" category: N = 325, Ratio of experience = 0.59, S.D. = 0.492      - "No" category: N = 677, Ratio of experience = 0.27, S.D. = 0.444    - The total number of respondents (1,002) and the combined categories (325 + 677) match, but the ratios suggest a significant difference without clear context or explanation. Maybe I'm missing a point, kindly elaborate a bit.

- Significant p-values are reported for variables with similar standard deviations, which should generally not be the case.

- Unclear Definition of p(F):

   - The table mentions p(F) values but does not explain what these values represent or how they were calculated. Prob( F-value)?

4. Cognitive Bias Explanations:

   The paper attributes various cognitive biases to overestimation and overplacement without adequately distinguishing between the effects of different biases or providing clear connections between these biases and the observed data. This results in a somewhat fragmented and inconsistent argument. Please add a short explanation, thank you.

The following one paper has recently addressed the linkages between the impact of business internships to raise transformative experience and  financial literacy. Apart from recency they will likely extend the visibility of this work. Schuhen, Susanne, Seitz, Mau, and Froitzheim. "Financial literacy of adults in Germany FILSA study results." Journal of Risk and Financial Management (2022).

Also I am noticing a Significant Digit Inconsistency:

   - The standard deviations (S.D.) for the ratios of experience are reported with two decimal places, while the ratios themselves are reported with two to three decimal places. For example:      - LTM group: Ratio is 0.25, S.D. is 0.434      - MDL group: Ratio is 0.34, S.D. is 0.474      - HTM group: Ratio is 0.58, S.D. is 0.494    - A consistent significant digit convention should be applied for clarity, thank you.

Nice overall work, incorporation and clarification of these items should make the paper top notch for this high quality journal in finance.

Author Response

Please see the attached file.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

Comments and Suggestions for Authors

The author's reply is valuable and convincing. I suggest publishing it in its current form. Congratulations to the author.

However, I still suggest that the research of this manuscript is aimed at South Korea in the title or abstract. This will avoid a lot of ambiguity or controversy.

Reviewer 3 Report

Comments and Suggestions for Authors

Good work. All the best.