Discounting Financial Literacy: Time Preferences and Participation in Financial Education Programs

Many policy makers and economists argue that financial literacy is key to financial well-being. But why do many individuals remain financially illiterate despite the apparent importance of being financially informed? This paper presents results of a field study linking individual decisions to acquire personal financial information to a critical, and normally unobservable, characteristic: time preferences. We offered a short, free credit counseling and information program to more than 870 individuals. About 55 percent chose to participate. Independently, we elicited time preferences using incentivized choice experiments both for individuals who selected into the program and those who did not. Our results show that the two groups differ sharply in their measured discount factors. Individuals who choose to acquire personal financial information through the credit counseling program discount the future less than individuals who choose not to participate. Our results suggest that individual time preference may explain who will and who will not choose to become financially literate. This has implications for the validity of studies evaluating voluntary financial education programs and policy efforts focused on expanding financial education.financial literacy, time preferences, selection, field experiment

Stability of Time Preferences

Individuals frequently face intertemporal decisions. For the purposes of economic analysis, the preference parameters assumed to govern these decisions are generally considered to be stable economic primitives. However, evidence on the stability of time preferences is notably lacking. In a large field study conducted over two years with about 1,400 individuals, time preferences are elicited using incentivized choice experiments. The aggregate distributions of discount factors and the proportion of present-biased individuals are found to be unchanged over the two years. At the individual level, the one year correlations in measured time preference parameters are found to be high by existing standards, though some individuals change their intertemporal choices potentially indicating unstable preferences. By linking time preference measures to tax return data, we show that identified instability is uncorrelated with socio-demographics and changes to income, future liquidity, employment and family composition.experimental economics, time preferences, preference stability

An Endowment Effect for Risk: Experimental Tests of Stochastic Reference Points

Recent models of reference-dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies. A subset of such expectations-based models predicts an “endowment effect for risk”: that risk attitudes differ when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-discussed confounds, I demonstrate both between and within subjects such an endowment effect for risk. These results provide needed separation between expectations-based reference-dependent models, allow for evaluation of recent theoretical extensions, and may help to close a long-standing debate in decision science on inconsistency between utility elicitation methodologies

An Endowment Effect for Risk: Experimental Tests of Stochastic Reference Points

Recent models of reference-dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies. A subset of such expectations-based models predicts an “endowment effect for risk”: that risk attitudes differ when reference points change from certain to stochastic. In two purposefully simple risk preference experiments, eliminating often-discussed confounds, I demonstrate both between and within subjects such an endowment effect for risk. These results provide needed separation between expectations-based reference-dependent models, allow for evaluation of recent theoretical extensions, and may help to close a long-standing debate in decision science on inconsistency between utility elicitation methodologies

Judging Experimental Evidence on Dynamic Inconsistency

This article briefly summarizes and judges recent experimental developments exploring the predictions of dynamically inconsistent models. An opinion is provided as to how the literature may evolve given these recent advances

Individuals and Identity in Economics by John B. Davis [Book Review]

The book, Individuals and Identity in Economics, by John Davis is the follow-up to Davis's previous work, The Theory of the Individual in Economics on the critical role and definition of the individual in economic thought. Beyond analyzing a conception of the individual as a collection of preferences, Davis seeks to resolve notions of atomistic, self-contained individuals with both post-World War II game theory and modem behavioral economics. The result is a well-developed, carefully constructed treatment giving food for thought for those interested in the philosophy of economics and the conception of the individual

Overborrowing and undersaving: lessons and policy implications from research in behavioral economics

The U.S. household carries over $7,500 in uncollateralized debt and likely saves at a negative rate. There is a growing body of evidence that this borrowing and saving behavior may not, as assumed by standard economics, be the product of rational financial planning. This paper discusses insights from behavioral economics on how self-control problems could play a crucial role in determining such financial outcomes. It is important to note that self-control problems, as defined in this paper, are thought of as an issue affecting all people, not just those involved in our specific research. ; The paper reports results from a field study targeted to low-to-moderate income individuals conducted in Dorchester, MA. It links measured self-control to borrowing and savings outcomes taken from individual credit reports and survey questions respectively. We find that self-control problems are associated with higher borrowing, specifically on credit cards, and lower savings of income tax refunds. The paper discusses how policy prescriptions built around addressing self-control issues could prove helpful in improving financial outcomes.Consumer credit ; Saving and investment