How financial literacy and impatience shape retirement wealth and investment behaviors. (27th September 2018)

• Record Type: Journal Article
• Authors: HASTINGS, JUSTINE; MITCHELL, OLIVIA S.
• Is Part Of: Journal of pension economics & finance. Volume 19:Number 1(2020:Jan.)
• Page Start: 1
• Page End: 20
• Publication Date: 2018-09-27
• Subjects: G41, -- H3, -- H55, -- J26; Household finance, -- pensions, -- present bias, -- financial literacy; Pensions -- Finance -- Periodicals; Social security -- Finance -- Periodicals; 331.25205
• DOI: 10.1017/S1474747218000227
• Languages: English
• ISSNs: 1474-7472

Abstract

Abstract: Two competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs. We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement well-being would do well to consider the importance of both factors.