Fighting Financial Frauds by Eye-opening Education Program
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Financial fraud is a prevailing issue 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 is unaware of the possibility of financial fraud. Unaware investors purchase financial products that are inconsistent with their risk attitudes, and their behaviors, in turn, provide an incentive for firms to conduct financial fraud. Reducing the fraction of unaware investor induces firms to behave honestly, and financial fraud disappears if this fraction drops below a certain threshold. With this insight, we experimentally measure investor’s risk attitude, the level of financial literacy, and the effect of an eye-opening financial education program. We also survey subjects’ demographic characteristics. Compared to assigning the education program randomly, targeted education will be more effective. Using the data from our experiments and surveys, we conduct a counterfactual analysis to quantify this effect.
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