Consumers assess their well-being subjectively, largely by comparing the present state of their lives to the state of comparable others and to their own state earlier in time. The authors suggest ...that consumers similarly assess their financial well-being, and when these evaluations highlight a deficit in their financial position, they pursue strategies that mitigate the associated sense of financial deprivation. Specifically, consumers counteract the relative deficit in their financial resources by acquiring goods that are consequently unavailable to other consumers in their environment. The results from five studies suggest that the inferiority and unpleasant affect associated with financial deprivation motivates consumers to attend to, choose, and consume scarce goods rather than comparable abundant goods. These effects diminish when scarce goods are limited because other people have already obtained them and when consumers attribute their unpleasant feelings to a source unrelated to financial deprivation.
We study the rapidly growing literature on the causal effects of financial education programs in a meta-analysis of 76 randomized experiments with a total sample size of over 160,000 individuals. ...Many of these experiments are published in top economics and finance journals. The evidence shows that financial education programs have, on average, positive causal treatment effects on financial knowledge and downstream financial behaviors. Treatment effects are economically meaningful in size, similar to those realized by educational interventions in other domains, and robust to accounting for publication bias in the literature. We also discuss the cost-effectiveness of financial education interventions.
Commitment products can remedy self-control problems. However, imperfect knowledge about their preferences may (discontinuously) lead individuals to select into incentive-incompatible commitments, ...which reduce their welfare. I conducted a field experiment in which low-income individuals were randomly offered a new installment-savings commitment account. Individuals chose a personalized savings plan and a default penalty themselves. A majority appears to choose a harmful contract: While the average effect on bank savings is large, 55% of clients default and incur monetary losses. A possible explanation is that the chosen penalties were too low (the commitment was too weak) to overcome clients’ self-control problems. Measures of sophisticated hyperbolic discounting correlate
negatively
with take-up and default, and positively with penalty choices. This finding is consistent with theoretical predictions that partial sophisticates adopt weak commitments and then default, whereas full sophisticates are more cautious about committing, but better able to choose incentive-compatible contracts.
This paper was accepted by John List, behavioral economics.
Smart money? Cole, Shawn A; Paulson, Anna Louise; Shastry, Gauri Kartini
The Review of financial studies,
07/2014, Letnik:
27, Številka:
7
Journal Article
Recenzirano
Odprti dostop
Household financial decisions are important for household welfare, economic growth, and financial stability. Yet our understanding of the determinants of financial decision making is limited. ...Exploiting exogenous variation in state compulsory schooling laws in both standard and two-sample instrumental variable strategies, we show that education increases financial market participation, measured by investment income and equities ownership, while dramatically reducing the probability that an individual declares bankruptcy, experiences a foreclosure, or is delinquent on a loan. Further results and a simple calibration suggest that the result is driven by changes in savings or investment behavior, rather than simply increased labor earnings.
Abstract
Foundational research in marketing and behavioral economics has revealed a great deal about the psychology of budgeting. However, little is known about the extent to which budgets do (or do ...not) influence consumers’ real-world spending. The present research addresses this gap in the literature using naturally occurring budgeting and spending data provided by a popular personal finance app in the UK, a field experiment conducted with members of a Canadian credit union, and a financial diary study conducted with consumers in the US. Budget compliance is generally weak because budgets are wildly optimistic. However, optimistic budgets do help consumers reduce their spending. Moreover, the influence of budgets on spending is surprisingly sticky: consumers continue to reduce their spending six months after setting a budget, even though spending remains over-budget. Impulsive consumers exhibit worse budget compliance than less-impulsive consumers. However, counterintuitively, this is predominately because more impulsive consumers set lower budgets than less-impulsive consumers, not because they spend more. Finally, we provide evidence that budgets influence spending across several theory-informing psychographic variables. Taken together, these findings show that budgets can be both wildly optimistic and highly influential and that beliefs about the nature of consumers’ budgets require updating.
We use an event study approach to examine the economic consequences of hospital admissions for adults in two datasets: survey data from the Health and Retirement Study, and hospitalization data ...linked to credit reports. For non-elderly adults with health insurance, hospital admissions increase out-of-pocket medical spending, unpaid medical bills, and bankruptcy, and reduce earnings, income, access to credit, and consumer borrowing. The earnings decline is substantial compared to the out-of-pocket spending increase, and is minimally insured prior to age-eligibility for Social Security Retirement Income. Relative to the insured non-elderly, the uninsured non-elderly experience much larger increases in unpaid medical bills and bankruptcy rates following a hospital admission. Hospital admissions trigger fewer than 5 percent of all bankruptcies in our sample.
Given the increasing complexities of the financial markets as well as a shift away from employer/government sponsored pensions to individuals managing their retirement funds, personal finance ...education is an important tool in order to navigate the evolving and complex financial environment. In this paper, I examine the impact of personal finance education on credit delinquency. Prior studies show that financial literacy affects financial decisions such as savings, retirement planning, wealth accumulation and stock market participation. Using U.S data on personal bankruptcy and consumer credit delinquency rates, I show that personal finance education is important in reducing personal bankruptcy as well as consumer credit delinquency rates. Furthermore, personal finance education does not appear to moderate the impact of gambling legislation on personal bankruptcy or consumer credit default.
•Basic financial literacy becomes a prerequisite due to the shift from company pension to asset-based policies.•Basic money-management skills are necessary to avoid costly financial mistakes.•Personal finance education is important in reducing personal bankruptcy as well as consumer credit delinquency rates.•Personal finance does not moderate the impact of gambling legislation on personal bankruptcy or consumer credit default.
This paper confirms earlier evidence that richer, educated households of larger size are less prone to making financial mistakes than other households. These results have motivated the construction ...of a single index of financial sophistication that best explains a set of three investment mistakes. The index of financial sophistication increases strongly with financial wealth and household size, and to a lesser extent with education and proxies for financial experience, but is lower for self-employed and immigrant households. It is of course difficult to unambiguously establish that any behavior is a mistake, especially when one considers the possibility of nonstandard preferences. The empirical finding that poorer, less educated, immigrant households are more prone to joint deviations from rational benchmarks makes it more plausible that these deviations are indeed mistakes.
This paper investigates the efficiency of household investment decisions using comprehensive disaggregated Swedish data. We consider two main sources of inefficiency: underdiversification (“down”) ...and nonparticipation in risky asset markets (“out”). While a few households are very poorly diversified, most Swedish households outperform the Sharpe ratio of their domestic stock index through international diversification. Financially sophisticated households invest more efficiently but also more aggressively, and overall they incur higher return losses from underdiversification. The return cost of nonparticipation is smaller by almost one‐half when we take account of the fact that nonparticipants would likely be inefficient investors.
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