IDEAS home Printed from https://ideas.repec.org/a/eee/joepsy/v87y2021ics0167487021000787.html
   My bibliography  Save this article

Cognitive abilities, self-efficacy, and financial behavior

Author

Listed:
  • Tang, Ning

Abstract

This paper investigates the effect of cognitive abilities on financial behavior among older adults. Using the U.S. Health and Retirement Study, I find that cognitive abilities significantly affect financial behavior through two channels: ability and self-efficacy. People with higher cognition scores achieve better financial outcomes. This positive association is especially strong in tasks having high demand of cognitive abilities, which confirms the ability channel of the cognitive ability effect. In addition, there is evidence for the self-efficacy channel as a secondary source of cognitive influence. Lower cognitive abilities decrease people’s sense of self-efficacy, which, in turn, significantly decreases financial management efficiency. The findings have important policy implications, specifically that more effort is needed to assist the growing older population through the cognitive aging process and that noncognitive skills, as a secondary source of influence, also warrant attention.

Suggested Citation

  • Tang, Ning, 2021. "Cognitive abilities, self-efficacy, and financial behavior," Journal of Economic Psychology, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:joepsy:v:87:y:2021:i:c:s0167487021000787
    DOI: 10.1016/j.joep.2021.102447
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167487021000787
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.joep.2021.102447?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Thomas Dohmen & Armin Falk & Bart H. H. Golsteyn & David Huffman & Uwe Sunde, 2017. "Risk Attitudes Across The Life Course," Economic Journal, Royal Economic Society, vol. 127(605), pages 95-116, October.
    2. Sumit Agarwal & Bhashkar Mazumder, 2013. "Cognitive Abilities and Household Financial Decision Making," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 193-207, January.
    3. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2009. "The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 51-117.
    4. Christelis, Dimitris & Jappelli, Tullio & Padula, Mario, 2010. "Cognitive abilities and portfolio choice," European Economic Review, Elsevier, vol. 54(1), pages 18-38, January.
    5. Stock, James H & Wright, Jonathan H & Yogo, Motohiro, 2002. "A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 518-529, October.
    6. George M Korniotis & Alok Kumar, 2011. "Do Older Investors Make Better Investment Decisions?," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 244-265, February.
    7. Alan S. Blinder, 1973. "Wage Discrimination: Reduced Form and Structural Estimates," Journal of Human Resources, University of Wisconsin Press, vol. 8(4), pages 436-455.
    8. Forbes, James & Kara, S. Murat, 2010. "Confidence mediates how investment knowledge influences investing self-efficacy," Journal of Economic Psychology, Elsevier, vol. 31(3), pages 435-443, June.
    9. Annamaria Lusardi, 2012. "Numeracy, financial literacy, and financial decision-making," NBER Working Papers 17821, National Bureau of Economic Research, Inc.
    10. Eun Kim & Sherman Hanna & Swarn Chatterjee & Suzanne Lindamood, 2012. "Who Among the Elderly Owns Stocks? The Role of Cognitive Ability and Bequest Motive," Journal of Family and Economic Issues, Springer, vol. 33(3), pages 338-352, September.
    11. Thomas Dohmen & Armin Falk & Bart H. H. Golsteyn & David Huffman & Uwe Sunde, 2017. "Risk Attitudes Across The Life Course," Economic Journal, Royal Economic Society, vol. 127(605), pages 95-116, October.
    12. Keith Jacks Gamble & Patricia A. Boyle & Lei Yu & David A. Bennett, 2015. "How Does Aging Affect Financial Decision Making?," Issues in Brief ib2015-1, Center for Retirement Research.
    13. Camelia M. Kuhnen & Brian T. Melzer, 2018. "Noncognitive Abilities and Financial Delinquency: The Role of Self‐Efficacy in Avoiding Financial Distress," Journal of Finance, American Finance Association, vol. 73(6), pages 2837-2869, December.
    14. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    15. Andrews,Donald W. K. & Stock,James H. (ed.), 2005. "Identification and Inference for Econometric Models," Cambridge Books, Cambridge University Press, number 9780521844413.
    16. Tang, Ning & Baker, Andrew, 2016. "Self-esteem, financial knowledge and financial behavior," Journal of Economic Psychology, Elsevier, vol. 54(C), pages 164-176.
    17. Kapteyn, Arie & Teppa, Federica, 2011. "Subjective measures of risk aversion, fixed costs, and portfolio choice," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 564-580, August.
    18. Laibson, David I. & Agarwal, Sumit & Driscoll, John C. & Gabaix, Xavier, 2009. "The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation," Scholarly Articles 4554335, Harvard University Department of Economics.
    19. Michael S. Finke & John S. Howe & Sandra J. Huston, 2017. "Old Age and the Decline in Financial Literacy," Management Science, INFORMS, vol. 63(1), pages 213-230, January.
    20. Ben Jann, 2008. "The Blinder–Oaxaca decomposition for linear regression models," Stata Journal, StataCorp LP, vol. 8(4), pages 453-479, December.
    21. Bandura, Albert, 1991. "Social cognitive theory of self-regulation," Organizational Behavior and Human Decision Processes, Elsevier, vol. 50(2), pages 248-287, December.
    22. Donkers, Bas & van Soest, Arthur, 1999. "Subjective measures of household preferences and financial decisions," Journal of Economic Psychology, Elsevier, vol. 20(6), pages 613-642, December.
    23. Abreu, Margarida & Mendes, Victor, 2012. "Information, overconfidence and trading: Do the sources of information matter?," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 868-881.
    24. Neymotin, Florence, 2010. "Linking self-esteem with the tendency to engage in financial planning," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 996-1007, December.
    25. Keith Jacks Gamble & Patricia A. Boyle & Lei Yu & David A. Bennett, 2015. "Aging and Financial Decision Making," Management Science, INFORMS, vol. 61(11), pages 2603-2610, November.
    26. Sarah Asebedo & Patrick Payne, 2019. "Market Volatility and Financial Satisfaction: The Role of Financial Self-Efficacy," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 20(1), pages 42-52, January.
    27. S. Chatterjee & M. Finke & N. Harness, 2011. "The impact of self-efficacy on wealth accumulation and portfolio choice," Applied Economics Letters, Taylor & Francis Journals, vol. 18(7), pages 627-631.
    28. Mark Grinblatt & Matti Keloharju & Juhani Linnainmaa, 2011. "IQ and Stock Market Participation," Journal of Finance, American Finance Association, vol. 66(6), pages 2121-2164, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Block, Joern & Kritikos, Alexander S. & Priem, Maximilian & Stiel, Caroline, 2022. "Emergency-aid for self-employed in the Covid-19 pandemic: A flash in the pan?," Journal of Economic Psychology, Elsevier, vol. 93(C).
    2. Justus Blaschke, 2022. "Gender differences in financial literacy among teenagers - Can confidence bridge the gap?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2144328-214, December.
    3. Mondal, Supratik & Traczyk, Jakub, 2023. "Conditionality of adaptiveness: Investigating the relationship between numeracy and adaptive behavior," Journal of Economic Psychology, Elsevier, vol. 96(C).
    4. Nicolas Eber & Patrick Roger & Tristan Roger, 2024. "Finance and intelligence: An overview of the literature," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 503-554, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicolas Eber & Patrick Roger & Tristan Roger, 2024. "Finance and intelligence: An overview of the literature," Journal of Economic Surveys, Wiley Blackwell, vol. 38(2), pages 503-554, April.
    2. Pannenberg, Markus & Friehe, Tim, 2019. "Does it really get better with age? Life-cycle patterns of confidence in Germany," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203497, Verein für Socialpolitik / German Economic Association.
    3. Kim, Hugh Hoikwang & Maurer, Raimond & Mitchell, Olivia S., 2016. "Time is money: Rational life cycle inertia and the delegation of investment management," Journal of Financial Economics, Elsevier, vol. 121(2), pages 427-447.
    4. Fabrizio Mazzonna & Franco Peracchi, 2018. "Self-assessed cognitive ability and financial wealth: Are people aware of their cognitive decline?," EIEF Working Papers Series 1808, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2018.
    5. Mazzonna, Fabrizio & Peracchi, Franco, 2020. "Are Older People Aware of Their Cognitive Decline? Misperception and Financial Decision Making," IZA Discussion Papers 13725, Institute of Labor Economics (IZA).
    6. Angrisani, Marco & Burke, Jeremy & Kapteyn, Arie, 2023. "Cognitive ability, cognitive aging, and debt accumulation," Journal of Banking & Finance, Elsevier, vol. 148(C).
    7. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    8. Oscar A. Stolper & Andreas Walter, 2017. "Financial literacy, financial advice, and financial behavior," Journal of Business Economics, Springer, vol. 87(5), pages 581-643, July.
    9. Kim, Hugh H. & Maurer, Raimond & Mitchell, Olivia S., 2021. "How financial literacy shapes the demand for financial advice at older ages," The Journal of the Economics of Ageing, Elsevier, vol. 20(C).
    10. Friehe, Tim & Pannenberg, Markus, 2019. "Overconfidence over the lifespan: Evidence from Germany," Journal of Economic Psychology, Elsevier, vol. 74(C).
    11. Almenberg, Johan & Dreber, Anna, 2015. "Gender, stock market participation and financial literacy," Economics Letters, Elsevier, vol. 137(C), pages 140-142.
    12. Hugh Hoikwang Kim & Raimond Maurer & Olivia S. Mitchell, 2019. "How Cognitive Ability and Financial Literacy Shape the Demand for Financial Advice at Older Ages," NBER Working Papers 25750, National Bureau of Economic Research, Inc.
    13. Tauni, Muhammad Zubair & Yousaf, Salman & Ahsan, Tanveer, 2020. "Investor-advisor Big Five personality similarity and stock trading performance," Journal of Business Research, Elsevier, vol. 109(C), pages 49-63.
    14. Cobb-Clark, Deborah A. & Kassenboehmer, Sonja C. & Sinning, Mathias G., 2016. "Locus of control and savings," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 113-130.
    15. María José Roa & Ignacio Garrón & Jonathan Barboza, 2019. "Financial Decisions and Financial Capabilities in the Andean Region," Journal of Consumer Affairs, Wiley Blackwell, vol. 53(2), pages 296-323, June.
    16. Bonsang, Eric & Dohmen, Thomas, 2015. "Risk attitude and cognitive aging," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 112-126.
    17. Emma Boswell Dean & Frank Schilbach & Heather Schofield, 2017. "Poverty and Cognitive Function," NBER Chapters, in: The Economics of Poverty Traps, pages 57-118, National Bureau of Economic Research, Inc.
    18. Francesco D’Acunto & Daniel Hoang & Maritta Paloviita & Michael Weber, 2023. "IQ, Expectations, and Choice," Review of Economic Studies, Oxford University Press, vol. 90(5), pages 2292-2325.
    19. Agarwal, Sumit & Ben-David, Itzhak & Yao, Vincent, 2017. "Systematic mistakes in the mortgage market and lack of financial sophistication," Journal of Financial Economics, Elsevier, vol. 123(1), pages 42-58.
    20. Su H. Shin & Dean R. Lillard & Jay Bhattacharya, 2019. "Understanding the Correlation between Alzheimer’s Disease Polygenic Risk, Wealth, and the Composition of Wealth Holdings," NBER Working Papers 25526, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Cognition; Self-efficacy; Personal finance; Older population;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:87:y:2021:i:c:s0167487021000787. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/joep .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.