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Cognitive Abilities and Household Financial Decision Making

  • Sumit Agarwal
  • Bhashkar Mazumder

We analyze the effects of cognitive abilities on two examples of consumer financial decisions where suboptimal behavior is well defined. The first example features the optimal use of credit cards for convenience transactions after a balance transfer and the second involves a financial mistake on a home equity loan application. We find that consumers with higher overall test scores, and specifically those with higher math scores, are substantially less likely to make a financial mistake. These mistakes are generally not associated with nonmath test scores. (JEL D14, G21)

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Article provided by American Economic Association in its journal American Economic Journal: Applied Economics.

Volume (Year): 5 (2013)
Issue (Month): 1 (January)
Pages: 193-207

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Handle: RePEc:aea:aejapp:v:5:y:2013:i:1:p:193-207
Note: DOI: 10.1257/app.5.1.193
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  1. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  2. Daniel J. Benjamin & Sebastian A. Brown & Jesse M. Shapiro, 2006. "Who is “Behavioral”? Cognitive Ability and Anomalous Preferences," Levine's Working Paper Archive 122247000000001334, David K. Levine.
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