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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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Bibliographic Info

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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References

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  1. 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, MIT Press, vol. 116(4), pages 1149-1187, November.
  2. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth," Working Papers, University of Michigan, Michigan Retirement Research Center wp114, University of Michigan, Michigan Retirement Research Center.
  3. Nava Ashraf & Dean S. Karlan & Wesley Yin, 2005. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," Working Papers, Economic Growth Center, Yale University 917, Economic Growth Center, Yale University.
  4. Justine S. Hastings & Lydia Tejeda-Ashton, 2008. "Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico," NBER Working Papers 14538, National Bureau of Economic Research, Inc.
  5. James J Choi & David Laibson & Brigitte C Madrian, 2008. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Levine's Working Paper Archive 122247000000002014, David K. Levine.
  6. 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.
  7. 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.
  8. David Bravo Urrutia & Olivia S. Mitchell & Petra Todd, 2007. "Learning from the Chilean Experience: The Determinants of Pension Switching," Working Papers, University of Chile, Department of Economics wp266, University of Chile, Department of Economics.
  9. Annamaria Lusardi & Olivia S. Mitchell, 2009. "How Ordinary Consumers Make Complex Economic Decisions: Financial Literacy and Retirement Readiness," NBER Working Papers 15350, National Bureau of Economic Research, Inc.
  10. 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.
  11. 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.
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Citations

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Cited by:
  1. Wei-Yin Hu & Olivia S. Mitchell & Cynthia Pagliaro & Stephen P. Utkus, 2013. "Evaluating Web-based Savings Interventions: A Preliminary Assessment," Working Papers, University of Michigan, Michigan Retirement Research Center wp299, University of Michigan, Michigan Retirement Research Center.
  2. Annamaria Lusardi & Olivia S. Mitchell, 2013. "The Economic Importance of Financial Literacy: Theory and Evidence," CeRP Working Papers 134, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  3. Annamaria Lusardi & Olivia S. Mitchell & Vilsa Curto, 2012. "Financial Sophistication in the Older Population," NBER Working Papers 17863, National Bureau of Economic Research, Inc.
  4. Justine S. Hastings & Ali Hortaçsu & Chad Syverson, 2013. "Advertising and Competition in Privatized Social Security: The Case of Mexico," NBER Working Papers 18881, National Bureau of Economic Research, Inc.
  5. Levitt, Steven D. & List, John A. & Neckermann, Susanne & Sado, Sally, 2012. "The behavioralist goes to school: Leveraging behavioral economics to improve educational performance," ZEW Discussion Papers 12-038, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Annamaria Lusardi & Olivia S. Mitchell, 2011. "Financial Literacy around the World: An Overview," NBER Working Papers 17107, National Bureau of Economic Research, Inc.
  7. Guiso, Luigi & Viviano, Eliana, 2013. "How Much Can Financial Literacy Help?," CEPR Discussion Papers 9693, C.E.P.R. Discussion Papers.
  8. Klapper, Leora & Lusardi, Annamaria & Panos, Georgios A., 2013. "Financial literacy and its consequences: Evidence from Russia during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3904-3923.
  9. Jere R. Behrman & Olivia S. Mitchell & Cindy K. Soo & David Bravo, 2012. "How Financial Literacy Affects Household Wealth Accumulation," American Economic Review, American Economic Association, vol. 102(3), pages 300-304, May.
  10. Annamaria Lusardi, 2012. "Numeracy, financial literacy, and financial decision-making," NBER Working Papers 17821, National Bureau of Economic Research, Inc.
  11. 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.
  12. Christopher B. Bumcrot & Judy Lin & Annamaria Lusardi, 2011. "The Geography of Financial Literacy," Working Papers, RAND Corporation Publications Department 893, RAND Corporation Publications Department.

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