Hostname: page-component-cd9895bd7-hc48f Total loading time: 0 Render date: 2024-12-24T00:03:29.801Z Has data issue: false hasContentIssue false
  • English
  • Français

How financial literacy and impatience shape retirement wealth and investment behaviors

Published online by Cambridge University Press:  27 September 2018

JUSTINE HASTINGS  and
OLIVIA S. MITCHELL Open the ORCID record for OLIVIA S. MITCHELL [Opens in a new window]
JUSTINE HASTINGS
Affiliation:
Brown University and NBER, Professor of Economics and International and Public Affairs, Box B, 64 Waterman Street, Providence, RI 02912, USA (e-mail: [email protected])
OLIVIA S. MITCHELL
Affiliation:
IFEBP Professor of Business Economics/Policy, The Wharton School, University of Pennsylvania, and NBER, 3620 Locust Walk, St. 3000 SH-DH, Philadelphia, PA 19104, USA (e-mail: [email protected])
Get access Rights & Permissions [Opens in a new window]

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 well-being would do well to consider the importance of both factors.

Keywords

G41H3H55J26Household financepensionspresent biasfinancial literacy
Type
Article
Information
Journal of Pension Economics & Finance , Volume 19 , Issue 1 , January 2020 , pp. 1 - 20
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abaluck, J. and Gruber, J. (2011) Choice inconsistencies among the elderly: evidence from plan choice in the medicare part D program. American Economic Review, 101(4): 1180–1210.Google Scholar
Arenas de Mesa, A., Bravo, D., Behrman, J. R., Mitchell, O. S., and Todd, P. E. (2008) The Chilean pension reform turns 25: lessons from the social protection survey. In Kay, S. and Sinha, T. (eds), Lessons From Pension Reform in the Americas, Oxford: Oxford University Press, pp. 23–58.Google Scholar
Ashraf, N., Karlan, D., and Yin, W. (2006) Tying odysseus to the mast; evidence from a commitment savings product in the Philippines. The Quarterly Journal of Economics, 121(2): 635–672.Google Scholar
Ausubel, L. M. (1991) The failure of competition in the credit card market. American Economic Review, 81(1): 50–81.Google Scholar
Behrman, J., Mitchell, O. S., Soo, C., and Bravo, D. (2012) Financial literacy and household wealth accumulation. American Economic Review, 102(3): 300–304.Google Scholar
Benartzi, S. and Thaler, R. H. (2001) Naïve diversification strategies in defined contribution saving plans. American Economic Review, 91(1): 79–98.Google Scholar
Bravo, D., Behrman, J., Mitchell, O. S., and Todd, P. (2004) Análisis y Principales Resultados: Primera Encuesta de Protección Social (Historia Laboral y Seguridad Social, 2002). http://www.proteccionsocial.cl/english/docs/AnalisisPrincipalesResultadosPrimeraEncuestaProteccionSocial.pdf.Google Scholar
Bravo, D., Behrman, J., Mitchell, O. S., and Todd, P. (2006) Encuesta de Protección Social 2004: Presentación General y Principales Resultados. http://www.proteccionsocial.cl/english/docs/Encuesta_Protección_Social%2020041.pdf.Google Scholar
Brown, J. R., Kapteyn, A., Luttmer, E., and Mitchell, O. S. (2017) Cognitive constraints on valuing annuities. Journal of the European Economic Association, 15(2): 429–462.Google Scholar
Choi, J. J., Laibson, D., and Madrian, B. C. (2010) Why does the Law of One price fail? An experiment on Index mutual funds. Review of Financial Studies, 23(4): 1405–1432.Google Scholar
Choi, J. J., Laibson, D., and Madrian, B. C. (2011) $100 bills on the sidewalk: suboptimal investment in 401(k) plans. Review of Economics and Statistics, 93(3): 748–763.Google Scholar
Cronqvist, H. and Thaler, R. H. (2004) Design choices in privatized social-security systems: learning from the Swedish experience. American Economic Review, 94(2): 424–428.Google Scholar
Duarte, F. and Hastings, J. S. (2010) Fettered Consumers and Sophisticated Firms: Evidence from Mexico's Privatized Social Security Market. Unpublished Manuscript, Yale University.Google Scholar
Hastings, J. and Tejeda-Ashton, L. (2008) Financial Literacy, Information and Demand Elasticity: Survey and Experimental Evidence from Mexico. NBER Working Paper No. 14538.Google Scholar
Hastings, J., Mitchell, O. S., and Chyn, E. (2011) Fees, framing, and financial literacy in the choice of pension manager. In Mitchell, O. S. and Lusardi, A. (eds), Financial Literacy: Implications for Retirement Security and the Financial Marketplace. Oxford: Oxford University Press, pp. 101–115.Google Scholar
Hastings, J. S., Madrian, B., and Skimmyhorn, W. (2013) Financial literacy, financial education, and economic outcomes. Annual Review of Economics, 5: 347–373.Google Scholar
Hilgert, M. A., Hogarth, J. M., and Beverly, S. G. (2003) Household financial management: the connection between knowledge and behavior. Federal Reserve Bulletin, 89: 309–322.Google Scholar
Kling, J. R., Mullainathan, S., Shafir, E., Vermeulen, L., and Wrobel, M. V. (2012) Comparison friction: experimental evidence from medicare drug plans. Quarterly Journal of Economics, 127(1): 199–235.Google Scholar
Lusardi, A. and Mitchell, O. S. (2007a) Baby boomer retirement security: the roles of planning, financial literacy, and housing wealth. Journal of Monetary Economics, 54: 205–224.Google Scholar
Lusardi, A. and Mitchell, O. S. (2007b) Financial Literacy and Retirement Planning: New Evidence from the RAND American Life Panel. NBER Working Paper 12585.Google Scholar
Lusardi, A. and Mitchell, O. S. (2008) Planning and financial literacy: how do women fare? American Economic Review (Papers and Proceedings), 98(2): 413–417.Google Scholar
Lusardi, A. and Mitchell, O. S. (2009) Financial Literacy: Evidence and Implications for Financial Education. Trends and Issues. TIAA Institute, New York, NY.Google Scholar
Lusardi, A. and Mitchell, O. S. (2014) The economic importance of financial literacy: theory and evidence. Journal of Economic Literature, 52(1): 5–44.Google Scholar
Lusardi, A. and Mitchell, O. S. (2017) How ordinary consumers make complex economic decisions: financial literacy and retirement readiness. Quarterly Journal of Finance, 7(03): 1–31.Google Scholar
Lusardi, A. and Tufano, P. (2015) Debt literacy, financial experience and overindebtedness. Journal of Pension Economics and Finance, 14(4): 332–368.Google Scholar
Madrian, B. and Shea, D. F. (2001) The power of suggestion: inertia in 401(k) participation and savings behavior. The Quarterly Journal of Economics, 116: 1149–1187.Google Scholar
Mitchell, O. S., Todd, P., and Bravo, D. (2008) Learning from the Chilean experience: the determinants of pension switching. In Lusardi, A. (ed.), Overcoming the Saving Slump: Making Financial Education and Saving Programs More Effective. University of Chicago Press, Chicago, pp. 301–323.Google Scholar
O'Donahue, T. and Rabin, M. (1999) Doing it Now or Later. American Economics Review, 89(1): 103–124.Google Scholar
OECD Directorate for Financial and Enterprise Affairs (Nd) Financial Education. http://www.oecd.org/department/0,3355,en_2649_15251491_1_1_1_1_1,00.html.Google Scholar
Ponce-Rodriguez, A. (2008) Teaser Rate Offers in the Credit Card Market: Evidence from Mexico. Stanford University Working Paper.Google Scholar
President's Advisory Committee on Financial Literacy (PACFL) (2008) Annual Report to the President: Executive Summary. http://www.ustreas.gov/offices/domestic-finance/financial-institution/fin-education/council/exec_sum.pdf.Google Scholar
Sirri, E. and Tufano, P. (1998) Costly search and mutual fund flows. Journal of Finance, 53, 1589–1622.Google Scholar