EXPLORING THE LINK BETWEEN FINANCIAL KNOWLEDGE, RISK AVERSION, AND INVESTMENT PREFERENCES: A EUROPEAN UNION ANALYSIS

Abstract

This paper examines the relationships between financial knowledge, risk profiles, digital competence, investment preferences, and financial behaviour across EU countries. Using data from the Flash Eurobarometer 525 survey conducted in 2023, the study distinguishes between self-assessed and tested financial literacy and constructs country-level indicators of short- and long-term risk profiles, digital skills, and financial product participation. The analysis reveals a systematic pattern of underconfidence, with individuals underestimating their actual financial knowledge. Tested financial literacy is strongly associated with higher risk tolerance and engagement in long-term financial products, including housing loans, insurance, and retirement investments, while self-assessed literacy shows a weaker and less consistent link to actual risk-taking. This finding underscores the importance of objective knowledge over confidence alone in shaping financial decisions. Short- and long-term risk profiles emerge as central determinants of financial behaviour, with long-term risk aversion most strongly associated with engagement in protective and long-horizon financial products such as pensions and insurance, while short-term risk aversion (financial fragility) tracks borrowing and investment behaviour through a “gambling for resurrection” dynamic. Results suggest that improving financial behaviour requires more than increasing financial knowledge.

JEL Classification

G40, D53, F65, G53, D81

Keywords

risk profiles, financial literacy, financial fragility, cross-country heterogeneity, behavioural finance

How to cite

Răzvan UIFALEAN (2026). EXPLORING THE LINK BETWEEN FINANCIAL KNOWLEDGE, RISK AVERSION, AND INVESTMENT PREFERENCES: A EUROPEAN UNION ANALYSIS. Financial Studies, 30(2), 6-39. DOI: 10.65672/fs.2026.2.1.

RePEc record

Handle: RePEc:vls:finstu:v:30:y:2026:i:2:p:6-39