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Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel

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  • Gianpaolo Parise
  • Kim Peijnenburg

Abstract

This paper provides evidence of how noncognitive abilities affect financial distress. In a representative panel of households, we find that people in the bottom quintile of noncognitive abilities are 10 times more likely to experience financial distress than those in the top quintile. We provide evidence that this relation largely arises from worse financial choices and lack of financial insight by low-ability individuals and reflects differential exposure to income shocks only to a lesser degree. We mitigate endogeneity concerns using an IV approach and an extensive set of controls. Implications for policy and finance research are discussed.Received September 24, 2017; editorial decision September 26, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Gianpaolo Parise & Kim Peijnenburg, 2019. "Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3884-3919.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:10:p:3884-3919.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz010
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    Cited by:

    1. N. Luotonen & V. Puttonen & E. Rantapuska, 2022. "Ability, Educational Attainment, and Household Financial Distress," Journal of Consumer Policy, Springer, vol. 45(4), pages 655-672, December.
    2. Balloch, Adnan & Engels, Christian & Philip, Dennis, 2022. "When It Rains It Drains: Psychological Distress and Household Net Worth," Journal of Banking & Finance, Elsevier, vol. 143(C).
    3. Rice, Nigel & Robone, Silvana, 2022. "The effects of health shocks on risk preferences: Do personality traits matter?," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 356-371.
    4. Burlinson, Andrew & Giulietti, Monica & Law, Cherry & Liu, Hui-Hsuan, 2021. "Fuel poverty and financial distress," Energy Economics, Elsevier, vol. 102(C).
    5. Firth, Chris & Stewart, Neil & Antoniou, Constantinos & Leake, David, 2023. "The effects of personality and IQ on portfolio outcomes," Finance Research Letters, Elsevier, vol. 51(C).
    6. Glewwe, Paul & Song, Yang & Zou, Xianqiang, 2022. "Labor market outcomes, cognitive skills, and noncognitive skills in rural China," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 294-311.
    7. Ye, Zihan & Zou, Xiaopeng & Post, Thomas & Mo, Weiqiao & Yang, Qianqian, 2022. "Too old to plan? Age identity and financial planning among the older population of China," China Economic Review, Elsevier, vol. 73(C).
    8. Sara Fernández-López & Marcos à lvarez-Espiño & Lucía Rey-Ares, 2023. "A Comprehensive Approach to Measuring Financial Vulnerability and Literacy: Unveiling Connections," SAGE Open, , vol. 13(4), pages 21582440231, November.
    9. Xing, Chao & Zhang, Yuming & Wang, Yuan, 2020. "Do Banks Value Green Management in China? The Perspective of the Green Credit Policy," Finance Research Letters, Elsevier, vol. 35(C).
    10. Carole Roan Gresenz & Jean M Mitchell & Belicia Rodriguez & R. Scott Turner & Wilbert Van der Klaauw, 2024. "The Financial Consequences of Undiagnosed Memory Disorders," Staff Reports 1106, Federal Reserve Bank of New York.
    11. Firth, Chris, 2020. "Protecting investors from themselves: Evidence from a regulatory intervention," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    12. Marco Angrisani & Marco Cipriani & Antonio Guarino & Ryan Kendall & Julen Zarate-Pina, 2024. "Non-Cognitive Skills at the Time of COVID-19: An Experiment with Professional Traders and Students," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 14(02), pages 1-37, June.
    13. Bajo, Emanuele & Cecchini, Marco & Oliver, Barry, 2023. "Psychological profile and investment decisions," Finance Research Letters, Elsevier, vol. 58(PA).
    14. Nagano, Mamoru & Uchida, Yuki, 2021. "Online Banking Users vs. Branch Visitors: Why Are Their Portfolio Returns Different?," MPRA Paper 105531, University Library of Munich, Germany.
    15. Xiaohuan Wang & Yifei Ma & Hua Li & Caixia Xue, 2022. "The Effect of Non-Cognitive Ability on Farmer’s Ecological Protection of Farmland: Evidence from Major Tea Producing Areas in China," IJERPH, MDPI, vol. 19(13), pages 1-15, June.
    16. Godfred Matthew Yaw Owusu & Gabriel Korankye & Octavia Ama Serwaa Otchere & Maryam Kriese, 2022. "Money on the mind: emotional and non-cognitive predictors and outcomes of financial behaviour of young adults," SN Business & Economics, Springer, vol. 2(11), pages 1-22, November.
    17. Gignac, Gilles E. & Stevens, Elizabeth M., 2024. "Attitude toward numbers: A better predictor of financial literacy and intelligence than need for cognition," Intelligence, Elsevier, vol. 103(C).
    18. Jiang, Zhengyang & Peng, Cameron & Yan, Hongjun, 2024. "Personality differences and investment decision-making," LSE Research Online Documents on Economics 121634, London School of Economics and Political Science, LSE Library.
    19. Majlesi, Kaveh & Molin, Elin & Roth, Paula, 2024. "Severe Health Shocks and Financial Well-Being," CINCH Working Paper Series (since 2020) 82497, Duisburg-Essen University Library, DuEPublico.
    20. Kleimeier, Stefanie & Hoffmann, Arvid O.I. & Broihanne, Marie-Hélène & Plotkina, Daria & Göritz, Anja S., 2023. "Determinants of individuals’ objective and subjective financial fragility during the COVID-19 pandemic," Journal of Banking & Finance, Elsevier, vol. 153(C).
    21. Márton Gosztonyi & Dániel Havran, 2022. "Highways to Hell? Paths Towards the Formal Financial Exclusion: Empirical Lessons of the Households from Northern Hungary," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 34(3), pages 1573-1606, June.
    22. Bu, Di & Hanspal, Tobin & Liao, Yin & Liu, Yong, 2020. "Financial literacy and self-control in FinTech: Evidence from a field experiment on online consumer borrowing," SAFE Working Paper Series 273, Leibniz Institute for Financial Research SAFE.

    More about this item

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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