How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors
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 these factors.
- In a nationally representative survey of Chileans in 2009, we find that those with more patience in investing and a greater ability to follow through on plans are much more likely to have higher retirement savings and invest in their health.
- Those who are more financially literate also tend to have more retirement savings.
- Those with less financial literacy and less education are more sensitive to how information about investment fee funds is framed.
- People are more responsive to rewards versus losses when calculating fund fees and selecting plan types.
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- UM10-11: Financial Literacy, Short-run Impatience, and the Determinants of Savings and Financial Management
Paper IDWP 2010-233