Understanding the Determinants of Financial Outcomes and Choices: The Role of Noncognitive Abilities
57 Pages Posted: 7 Jun 2017
There are 3 versions of this paper
Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel
Understanding the Determinants of Financial Outcomes and Choices: The Role of Noncognitive Abilities
Understanding the Determinants of Financial Outcomes and Choices: The Role of Noncognitive Abilities
Date Written: May 28, 2017
Abstract
We explore how financial distress and choices are affected by noncognitive abilities. Our measures stem from research in psychology and economics. In a representative panel of households, we find that people in the bottom decile of noncognitive abilities are five times more likely to experience financial distress compared to those in the top decile. Relatedly, individuals with lower noncognitive abilities make financial choices that increase their likelihood of distress: They are less likely to plan for retirement and save, and more likely to buy impulsively and to have unsecured debt. Causality is shown using childhood trauma as an instrument.
Keywords: Noncognitive abilities, financial distress, financial choices, saving, unsecured debt, behavioral finance, psychology and economics
JEL Classification: D10; D14; G02
Suggested Citation: Suggested Citation