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The investment decisions of young adults under relaxed borrowing constraints

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  • Insler, Michael
  • Compton, James
  • Schmitt, Pamela

Abstract

Students at the United States Naval Academy have the opportunity to take a Career Starter Loan (CSL). Two military-oriented banks offer these large personal loans at very low interest rates to all students. Thus the CSL provides a novel opportunity to study the behavior of a sample of borrowers that is not selected due to credit history and is often too liquidity-constrained to invest. Using survey data, this paper examines borrowers’ investment and consumption decisions in relation to their cognitive ability (measured by the Cognitive Reflection Test, the SAT, and grade point average), personality traits (captured by the Myers–Briggs Type Indicator), and other demographic characteristics. Tobit models reveal that: (1) cognitive ability is positively associated with more investment and riskier choices; (2) some MBTI personality traits are strong predictors of investment behavior; (3) individuals with prior investment experience or who view themselves as financially literate tend to invest more and with more risk; (4) these findings are largely consistent across students from all income levels.

Suggested Citation

  • Insler, Michael & Compton, James & Schmitt, Pamela, 2016. "The investment decisions of young adults under relaxed borrowing constraints," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 106-121.
    • Handle: RePEc:eee:soceco:v:64:y:2016:i:c:p:106-121
    DOI: 10.1016/j.socec.2015.07.004
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    1. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive abilities and behavioral biases," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 147-152, October.
    2. Steffen Andersen & Kasper Meisner Nielsen, 2011. "Participation Constraints in the Stock Market: Evidence from Unexpected Inheritance Due to Sudden Death," Review of Financial Studies, Society for Financial Studies, vol. 24(5), pages 1667-1697.
    3. Scott E. Carrell & Richard L. Fullerton & James E. West, 2009. "Does Your Cohort Matter? Measuring Peer Effects in College Achievement," Journal of Labor Economics, University of Chicago Press, vol. 27(3), pages 439-464, July.
    4. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    5. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive Abilities and Behavioral Biases," Working Papers 0465, University of Heidelberg, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Calvin Mudzingiri & Sevias Guvuriro & Charity Gomo, 2021. "Exploring Association between Self-Reported Financial Status and Economic Preferences Using Experimental Data," JRFM, MDPI, vol. 14(6), pages 1-13, May.
    2. Kiss, Hubert János & Rodriguez-Lara, Ismael & Rosa-García, Alfonso, 2015. "Kognitív képességek és stratégiai bizonytalanság egy bankrohamkísérletben [Cognitive abilities and strategic uncertainty in a bank-run experiment]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1030-1047.
    3. Hyunwoo Woo & So Young Sohn, 2022. "A credit scoring model based on the Myers–Briggs type indicator in online peer-to-peer lending," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-19, December.
    4. Cueva, Carlos & Iturbe-Ormaetxe, Iñigo & Mata-Pérez, Esther & Ponti, Giovanni & Sartarelli, Marcello & Yu, Haihan & Zhukova, Vita, 2016. "Cognitive (ir)reflection: New experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 81-93.
    5. Rao, Aniruddha S. & Lakkol, Savitha G., 2022. "A review on personality models and investment decisions," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    6. Andreoni, James & Di Girolamo, Amalia & List, John A. & Mackevicius, Claire & Samek, Anya, 2020. "Risk preferences of children and adolescents in relation to gender, cognitive skills, soft skills, and executive functions," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 729-742.
    7. Jesús F. Salgado & Inmaculada Otero & Silvia Moscoso, 2019. "Cognitive Reflection and General Mental Ability as Predictors of Job Performance," Sustainability, MDPI, vol. 11(22), pages 1-16, November.
    8. Stoian, Andreea & Vintila, Nicoleta & Iorgulescu, Filip & Cepoi, Cosmin Octavian & Dina Manolache, Aurora, 2021. "How Risk Aversion and Financial Literacy Shape Young Adults’ Investment Preferences," MPRA Paper 109755, University Library of Munich, Germany.
    9. Brañas-Garza, Pablo & Smith, John, 2016. "Cognitive abilities and economic behavior," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 1-4.

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    More about this item

    Keywords

    Survey methods; Behavioral economics; Personal finance; Investment decisions;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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