How financial literacy and impatience shape retirement wealth and investment behaviors

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.

Sticking to Your Plan: The Role of Present Bias for Credit Card Paydown

“…Bernheim and Garrett (2003) and Bernheim, Garrett and Maki (2001) show that financial education increases savings. Hastings and Mitchell (2011) show that while short-run impatience is a strong predictor for retirement savings in Chile, financial literacy is also correlated with savings levels. Stango and Zinman (2009) show that households who exhibit exponential growth bias borrow more.…”

Sustainable Financial Education and Consumer Life Satisfaction

“…Therefore, it is particularly important for consumers to strengthen financial education. Hastings and Mitchell [37] argued that consumers having trouble with financial decisions were specific to various cohorts; for instance, although the improvement in financial literacy through financial education was significantly correlated with wealth, it appeared to be a weaker predictor of sensitivity to framing in investment decisions. In addition, these financial education courses, which are related to financial knowledge, have a long-term positive effect on consumers [38].…”

The Impacts of Future Orientation and Financial Literacy on Personal Financial Management Practices among Generation Y in Malaysia: The Moderating Role of Gender

“…Australian Securities and Investments Commission (ASIC) [16] found that financial literacy is a necessary financial skill required among individuals to improve their standard of living and financial well-being. Past studies have emphasized the importance of financial literacy in financial behavior [17,8]. Based on the argument of Garman and Forgue [18], the key to good personal financial management is said to be financial literacy.…”