Human trust is a strong belief that the interactions between two or more people are based on reliability and truth. It is a straightforward concept but is often a difficult one to measure. In this paper, we review trust from a financial economic perspective, which involves financial transactions that occur in various markets. These transactions are made by individuals on their own behalf or as agents for other individuals or legal entities and are typically abetted by appropriate financial markets and institutions. Our survey covers more than 70 economic and finance journal articles and related publications that, with a few notable exceptions, were published in the last 25 years. The studies show that, among other things, trust is positively related to the completeness of financial contracts, increased participation in stock markets, and acquisition of insurance. Study results on the interaction between individuals and their financial advisors are mixed. Although some advisors may provide helpful guidance, many are driven by their own self-interest, although this may be mitigated by a close personal relationship between the two the advisor and advisee. These findings give support to the belief that private and public efforts should be made to increase financial literacy to help individuals find an advisor they trust.
Agnew, J. R., Bateman, H., Eckert, C., Iskhakov, F., Louviere, J., & Thorp, S. (2018). First Impressions Matter: An Experimental Investigation of Online Financial Advice. Management Science, 64, 288-307. https://doi.org/10.1287/mnsc.2016.2590
Agnew, J., Balduzzi, P., & Sunden, A. (2003). Portfolio Choice and Trading in a Large 401(k) Plan. American Economic Review, 93, 193-215. https://doi.org/10.1257/000282803321455223
Anagol, S., Cole, S., & Sarker, S. (2017). Understanding the Advice of Commission-Motivated Agents: Evidence from the Indian Life Insurance Market. Review of Economics and Statistics, 99, 1-15. https://doi.org/10.1162/REST_a_00625
Barber, B. M., & Odean, T. (2000). Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Journal of Finance, 55, 773-806. https://doi.org/10.1111/0022-1082.00226
Bergstresser, D., Chalmers, J. M. R., & Tufano, P. (2009). Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry. Review of Financial Studies, 22, 4129-4156. https://doi.org/10.1093/rfs/hhp022
Bhattacharya, U., Hackethal, A., Kaesler, S., Loos, B., & Meyer, S. (2012). Is Unbiased Financial Advice to Retail Investors Sufficient? Answers from a Large Field Study. Review of Financial Studies, 25, 975-1032. https://doi.org/10.1093/rfs/hhr127
Blume, M. E., & Friend, I. (1975). The Asset Structure of Individual Portfolios and Some Implications for Utility Functions. Journal of Finance, 30, 585-603. https://doi.org/10.2307/2978737
Booth, G. G., & Karagiannidis I. (2023). An Ancient Ancestor of the U.S. Secured Overnight Financing Rate Determination: The Florin Fix. Multinational Finance Journal, in press.
Butler, J. V., Giuliano, P., & Guiso, L. (2016). The Right Amount of Trust. Journal of the European Economic Association, 14, 1155-1180. https://doi.org/10.1111/jeea.12178
Calvet, L. E., Campbell, J. Y., & Sodini, P. (2007). Down or Out: Assessing the Welfare Costs of Household Investment Mistakes. Journal of Political Economy, 115, 707-747. https://doi.org/10.1086/524204
Calvet, L. E., Campbell, J. Y., & Sodini, P. (2009). Fight or Flight? Portfolio Rebalancing by Individual Investors. The Quarterly Journal of Economics, 124, 301-348. https://doi.org/10.1162/qjec.2009.124.1.301
Campbell, J. Y. (2006). Household Finance. Journal of Finance, 61, 1553-1604. https://doi.org/10.1111/j.1540-6261.2006.00883.x
Chalmers, J., & Reuter, J. (2020). Is the Conflict in Investment Advice Better than No Advisor. Journal of Financial Economics, 138, 366-387. https://doi.org/10.1016/j.jfineco.2020.05.005
Christoffersen, S. E. K., Evans, R., & Musto, D. K. (2013). What Do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives. Journal of Finance, 68, 201-235. https://doi.org/10.1111/j.1540-6261.2012.01798.x
Clifford, C. P., & Gerken, W. C. (2021). Property Rights to Client Relationships and Financial Advisor Incentives. Working Paper, Gatton College of Business and Economics, University of Kentucky.
Cole, S., Giné, X., Tobacman, J., Topalova, P., Townsend, R., & Vickery, J. (2013). Barriers to Household Risk Management: Evidence from India. American Economic Journal: Applied Economics, 5, 104-135. https://doi.org/10.1257/app.5.1.104
Cookson, J. A., Fox, C., Gil-Bazo, J., Imbet, J. F., & Stiller, C. (2023). Social Media as a Bank Run Catalyst. Journal of Financial Economics, 143, 905-931. https://doi.org/10.2139/ssrn.4422754
D’Acunto, F., Xie, J., & Yao, J. (2020). Trust and Contracts: Empirical Evidence. https://ssrn.com/abstract=3728808
Dak-Adzaklo, C. S. P., & Wong, R. M. K. (2024). Corporate Governance Reforms, Societal Trust, and Corporate Financial Policies. Journal of Corporate Finance, 84, Article 102507. https://doi.org/10.1016/j.jcorpfin.2023.102507
Del Guercio, D., & Reuter, J. (2014). Mutual Fund Performance and the Incentive to Generate Alpha. Journal of Finance, 69, 1673-1704. https://doi.org/10.1111/jofi.12048
Dimmock, S. G., Gerken, W. C., & Graham, N. P. (2018). Is Fraud Contagious? Coworker Influence on Misconduct by Financial Advisors. Journal of Finance, 73, 1417-1450. https://doi.org/10.1111/jofi.12613
Dimson, E., Marsh, P., & Staunton, M. (2006). Chap. 11: The Worldwide Equity Premium: A Smaller Puzzle. In R. Mehra (Ed.), Handbook of the Equity Risk Premium (pp. 467-514). Elsevier. https://doi.org/10.1016/B978-044450899-7.50023-3
Dorn, D., & Weber, M. (2017). Losing Trust in Money Doctors. https://ssrn.com/abstract=2705435
Drobetz, W., Möntemayor, M., Requejo, M., & Shröeder, H. (2023). Foreign Bias in Institutional Portfolio Allocation: The Role of Social Trust. Journal of Economic Behavior & Organization, 214, 233-269. https://doi.org/10.1016/j.jebo.2023.07.023
Egan, M. (2019). Brokers versus Retail Investors: Conflicting Interests and Dominated Products. Journal of Finance, 74, 1217-1260. https://doi.org/10.1111/jofi.12763
Egan, M., Matvos, G., & Seru, A. (2019). The Market for Financial Adviser Misconduct. Journal of Political Economy, 127, 233-295. https://doi.org/10.1086/700735
Foa, G., Gambacorta, L., Guiso, L., & Mistrulla, R. E. (2015). The Supply Side of Household Finance. https://ssrn.com/abstract=2757072
Foerster, S., Linnainmaa, J. T., Melzer, B. T., & Previtero, A. (2017). Retail Financial Advice: Does One Size Fit All? Journal of Finance, 72, 1441-1482. https://doi.org/10.1111/jofi.12514
Fotak, V., Jiang, F., Lee, H., & Lie, E. (2023). Trust and Debt Contracting: Evidence from the Backdating Scandal. Journal of Financial and Quantitative Analysis, 58, 615-646. https://doi.org/10.1017/S0022109022000205
Friesen, G. C., & Sapp, T. R. A. (2007). Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability. Journal of Banking & Finance, 31, 2796-2816. https://doi.org/10.1016/j.jbankfin.2007.01.024
Gaudecker, H. M. V. (2015). How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice? The Journal of Finance, 70, 489-507. https://doi.org/10.1111/jofi.12231
Gelman, M., Khan, Z., & Shoham, A. (2022). The Cyclicality of Investment Misconduct. https://ssrn.com/abstract=4096324
Gennaioli, N., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2022). Trust and Insurance Contracts. Review of Financial Studies, 35, 5287-5331. https://doi.org/10.1093/rfs/hhab112
Gennaioli, N., Shleifer, A., & Vishny, R. (2015). Money Doctors. Journal of Finance, 70, 91-114. https://doi.org/10.1111/jofi.12188
Germann, M., Loos, B., & Weber, M. (2018). Trust and Delegated Investing: A Money Doctors Experiment. https://ssrn.com/abstract=3187189
Gomes, F., Haliassos, M., & Ramadorai, T. (2021). Household Finance. Journal of Economic Literature, 59, 919-1000. https://doi.org/10.1257/jel.20201461
Guiso, L., Haliassos, M., & Jappelli, T. (2002). Household Portfolios. MIT Press. https://doi.org/10.7551/mitpress/3568.001.0001
Guiso, L., Pozzi, A., Tsoy, A., Gambacorta, L., & Mistrulli, P. E. (2018). The Cost of Distorted Financial Advice: Evidence from the Mortgage Market. https://ssrn.com/abstract=2951042
Guiso, L., Sapienza, P., & Luigi Zingales. (2004). The Role of Social Capital in Financial Development. American Economic Review, 94, 526-556. https://doi.org/10.1257/0002828041464498
Guiso, L., Sapienza, P., & Luigi Zingales. (2006). Does Culture Affect Economic Outcomes? Journal of Economic Perspectives, 20, 23-48. https://doi.org/10.1257/jep.20.2.23
Guiso, L., Sapienza, P., & Zingales, L. (2008). Trusting the Stock Market. Journal of Finance, 63, 2557-2600. https://doi.org/10.1111/j.1540-6261.2008.01408.x
Guiso, L., Sapienza, P., & Zingales, L. (2011). Chap. 10. Civic Capital as the Missing Link. In Handbook of Social Economics (Vol. 1, pp. 417-480). Elsevier. https://doi.org/10.1016/B978-0-444-53187-2.00010-3
Gurun, A., & Booth, G. G. (2020). Financial Literacy Is Important. Strategies in Accounting and Management, 1, 1-2. https://doi.org/10.31031/SIAM.2020.01.000511
Gurun, U. G., Stoffman, N., & Yonker, S. E. (2018). Trust Busting: The Effect of Fraud on Investor Behavior. Review of Financial Studies, 31, 1341-1376. https://doi.org/10.1093/rfs/hhx058
Gurun, U. G., Stoffman, N., & Yonker, S. E. (2021). The Importance of Relationships in the Financial Advisory Industry. Journal of Financial Economics, 141, 1218-1243. https://doi.org/10.1016/j.jfineco.2021.04.026
Hackethal, A., Haliassos, M., & Jappelli, T. (2012). Financial Advisors: A Case of Babysitters? Journal of Banking & Finance, 36, 509-524. https://doi.org/10.1016/j.jbankfin.2011.08.008
Hayes, A., Khartit, K., & Ecker, J. (2023). Bernie Madoff: Who He Was, How His Ponzi Scheme Worked. https://www.investopedia.com/terms/b/bernard-madoff.asp
Hoechle, D., Ruenzi, S. Schaub, N., & Schmid, M. (2017). The Impact of Financial Advice on Trade Performance and Behavioral Biases. Review of Finance, 21, 871-910. https://doi.org/10.1093/rof/rfw032
Hoechle, D., Ruenzi, S. Schaub, N., & Schmid, M. (2018). Financial Advice and Bank Profits. Review of Financial Studies, 31, 4447-4492. https://doi.org/10.1093/rfs/hhy046
Homanen, M. (2018). Depositors Disciplining Banks: The Impact of Scandals. Chicago Booth Research Paper, University of Chicago.
Inderst, R., & Ottaviani, M. (2009). Misselling through Agents. American Economic Review, 99, 883-908. https://doi.org/10.1257/aer.99.3.883
Inderst, R., & Ottaviani, M. (2012a). Competition through Commissions and Kickbacks. American Economic Review, 102, 780-809. https://doi.org/10.1257/aer.102.2.780
Inderst, R., & Ottaviani, M. (2012b). Financial Advice. Journal of Economic Literature, 50, 494-512. https://doi.org/10.1257/jel.50.2.494
International Monetary Fund (2023). World Economic Outlook (October 2023)—GDP per Capita, Current Prices.
Kapoor, S. (2023). Case Study: FTX and Sam Bankman-Fried. Seven Pillars Institute for Global Finance and Ethics, Queen Mary College, University of London.
Klapper, L., Lusardi, A., & van Oudheusden, P. (2015). Financial Literacy around the World: Insights from the Standard & Poor’s Ratings Services Global Financial Literacy Survey. Standard & Poor’s, Global Financial Excellence Center (GFLEC), & World Bank.
Kostovetsky, L. (2016). Whom Do You Trust? Investor-Advisor Relationships and Mutual Fund Flows. Review of Financial Studies, 29, 898-936. https://doi.org/10.1093/rfs/hhv053
Kramer, M. M. (2012). Financial Advice and Individual Investor Portfolio Performance. Financial Management, 41, 395-428. https://doi.org/10.1111/j.1755-053X.2012.01185.x
Lel, U., L., Martin, G.S., & Qin, Z. (2023). Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers. Journal of Financial and Quantitative Finance, 58, 1547-1581. https://doi.org/10.1017/S0022109022000886
Limback, P., Rau, P. R., & Sherman, H. (2023). The Decline of Trust across the U.S. Finance Industry. Journal of Economic Behavior & Organization, 213, 324-344. https://doi.org/10.1016/j.jebo.2023.07.006
Linnainmaa, J. T., Melzer, B., & Previtero, A. (2018). The Misguided Beliefs of Financial Advisors. Kelley School of Business.
Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis. Journal of Finance, 72, 1785-1824. https://doi.org/10.1111/jofi.12505
Lusardi, A., & Messy, F.-A. (2023). The Importance of Financial Literacy and Its Impact on Financial Wellbeing. Journal of Financial Literacy and Wellbeing, 1, 1-28. https://doi.org/10.1017/flw.2023.8
Lusardi, A., & Mitchel, O. S. (2021). Financial Literacy around the World: An Overview. Working Paper 17107, National Bureau of Economic Research.
Lusardi, A., & Mitchel, O. S. (2023). The Importance of Financial Literacy: Opening a New Field. Working Paper 31145, National Bureau of Economic Research. https://doi.org/10.3386/w31145
Madrian, B. C., & Shea, D. F. (2001). The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior. The Quarterly Journal of Economics, 116, 1149-1187. https://doi.org/10.1162/003355301753265543
Mehra, R., & Prescott, E. C. (1985). The Equity Premium: A Puzzle. Journal of Monetary Economics, 15, 145-161. https://doi.org/10.1016/0304-3932(85)90061-3
Monroe, H., Carvajal, A., & Patillo, C. (2010). Perils of Ponzis. Finance & Development, 47, 37-39.
Mullainathan, S., Noeth, M., & Schoar, A. (2012). The Market for Financial Advice: An Audit Study. National Bureau of Economic Research. https://doi.org/10.3386/w17929
Odean, T. (1999). Do Investors Trade Too Much? American Economic Review, 89, 1279-1298. https://doi.org/10.1257/aer.89.5.1279
Ram, A. (2023). Understanding FinTech Gender Gap: A Survey on Financial Literacy, Inclusion and FinTech Use. Open Journal of Business and Management, 11, 3518-3538. https://doi.org/10.4236/ojbm.2023.116192
Shefrin, H., & Statman, M. (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence. Journal of Finance, 40, 777-790. https://doi.org/10.1111/j.1540-6261.1985.tb05002.x
Thakor, R. T., & Merton, R. C. (2018). Trust in Lending. National Bureau of Economic Research. https://doi.org/10.3386/w24778