Cognitive ability, financial literacy, and narrow bracketing in time-preference elicitation

Abstract

We study the role of cognitive ability and financial literacy for inter-temporal decision-making using an adapted version of the Convex Time Budget Protocol. We document substantial heterogeneity in choice-patterns and estimated parameters at the individual-level: We find that subjects with higher cognitive ability and domain specific-knowledge are more likely to make patient inter-temporal choices, to allocate the entire budget to a single payment-date, and to allocate the entire budget to corner choices as interest rates increase. At the same time, domain specific knowledge is uncorrelated with choice consistency and estimated individual error parameters, suggesting these results are not driven by a reduction in random noise among high ability respondents. These results serve as suggestive evidence for inter-temporal arbitrage among high ability respondents, thereby revealing a potential confound in time-preference elicitation tasks relying on time-dated monetary rewards.

Financial Literacy and Financial Education: An Overview

“…First, financial literacy and time preferences (i.e., individual-level discount factors) appear positively correlated in many empirical inquiries. On average, individuals with more patience appear to be more financially literate (Bianchi 2018;Oberrauch and Kaiser 2022). One mechanism may be that patient individuals are more likely to acquire financial information, for example, by participating in voluntary financial education programs (Meier and Sprenger 2013).…”

Financial Literacy and Financial Education: An Overview

“…First, financial literacy and time preferences (i.e., individual-level discount factors) appear positively correlated in many empirical inquiries. On average, individuals with more patience appear to be more financially literate (Bianchi 2018;Oberrauch and Kaiser 2022). One mechanism may be that patient individuals are more likely to acquire financial information, for example, by participating in voluntary financial education programs (Meier and Sprenger 2013).…”

Unraveling the Fallacy of Expertise: Exploring the Influence of Product-Related Experience on Consumer Perception of Product Knowledge

“…This leads to the general assumption that decision-making is mainly a matter of an individual's ability to process information from internal (i.e., memory) and external sources (i.e., advertisements) [5]. Personality traits have also been taken into account, with research examining the influence of self-control [6], happiness [7], social uncertainty on decision-making [8], the importance of environmental sustainability of products [9][10][11], price thresholds [12], and inter-temporal decision-making [13]. Overall, economic research on decision-making currently focuses on the capacity of individuals to process a vast amount of information, which is influenced by personal traits, cultural background [14,15], and situational effects.…”