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How financial literacy and impatience shape retirement wealth and investment behaviors

Published online by Cambridge University Press:  27 September 2018

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: justine_hastings@brown.edu)
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: mitchelo@wharton.upenn.edu)

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.

Type
Article
Copyright
Copyright © Cambridge University Press 2018 

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