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How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors

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  • Justine S. Hastings
  • Olivia S. Mitchell

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 wellbeing would do well to consider the importance of these factors.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16740.

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Date of creation: Jan 2011
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Handle: RePEc:nbr:nberwo:16740

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  1. Alberto Arenas de Mesa & David Bravo & Jere R. Behrman & Olivia S. Mitchell & Petra E. Todd, 2006. "The Chilean Pension Reform Turns 25: Lessons From the Social Protection Survey," NBER Working Papers 12401, National Bureau of Economic Research, Inc.
  2. James J. Choi & David Laibson & Brigitte C. Madrian, 2011. "$100 Bills on the Sidewalk: Suboptimal Investment in 401(k) Plans," The Review of Economics and Statistics, MIT Press, vol. 93(3), pages 748-763, August.
  3. James Choi & David Laibson & Brigitte Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Yale School of Management Working Papers amz2369, Yale School of Management, revised 05 May 2008.
  4. David Bravo Urrutia & Olivia S. Mitchell & Petra Todd, 2007. "Learning from the Chilean Experience: The Determinants of Pension Switching," Working Papers wp266, University of Chile, Department of Economics.
  5. Jere R. Behrman & Olivia S. Mitchell & Cindy Soo & David Bravo, 2010. "Financial Literacy, Schooling, and Wealth Accumulation," NBER Working Papers 16452, National Bureau of Economic Research, Inc.
  6. Nava Ashraf & Dean S. Karlan & Wesley Yin, 2005. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," Working Papers 917, Economic Growth Center, Yale University.
  7. Brigitte C. Madrian & Dennis F. Shea, 2001. "THE POWER OF SUGGESTION: INERTIA IN 401(k) PARTICIPATION AND SAVINGS BEHAVIOR," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1149-1187, November.
  8. Fabian Duarte & Justine S. Hastings, 2012. "Fettered Consumers and Sophisticated Firms: Evidence from Mexico's Privatized Social Security Market," NBER Working Papers 18582, National Bureau of Economic Research, Inc.
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Cited by:
  1. Christopher B. Bumcrot & Judy Lin & Annamaria Lusardi, 2011. "The Geography of Financial Literacy," Working Papers 893, RAND Corporation Publications Department.
  2. Lusardi, Annamaria & Mitchell, Olivia S. & Curto, Vilsa, 2012. "Financial sophistication in the older population," CFS Working Paper Series 2012/08, Center for Financial Studies (CFS).
  3. Leora F. Klapper & Annamaria Lusardi & Georgios A. Panos, 2012. "Financial Literacy and the Financial Crisis," NBER Working Papers 17930, National Bureau of Economic Research, Inc.
  4. Annamaria Lusardi, 2012. "Numeracy, financial literacy, and financial decision-making," NBER Working Papers 17821, National Bureau of Economic Research, Inc.

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