Financial literacy, cognitive abilities, and long-term decision making : Five essays on individual behavior

Abstract

Extensive pensions reforms in Germany will result in lower pension income from the public pension system. Thus, individuals are increasingly responsible for filling the gap arising in retirement income. But how well-equipped are individuals to plan for their own retirement? The analysis of financial literacy shows that about half of the respondents in Germany are not able to answer three fundamental financial literacy questions. Women, households in east Germany, as well as those with lower incomes and low levels of education are at risk of having low levels of financial literacy. There is a strong correlation between financial decision-making and financial literacy. Those with lower level of financial literacy are less likely to plan for retirement, less likely to own private pensions, and less likely to get financial advice and the quality of advice which they do receive is worse. Additionally, they are more likely to have realized losses during the financial crisis by selling loser assets. This can have wide-reaching consequences for the wealth distribution. Interventions to support these groups appear necessary. This is a cumulative dissertation. Beside the general introduction (Chapter 1) it contains five articles, which were partly written with co-authors. Chapter 2 titled „Financial Literacy and Retirement Planning in Germany“ is co-authored with Annamaria Lusardi. Chapter 3 is titled „Financial Literacy and Retirement Planning“. Chapter 4 „Do Smarter Consumers Get Better Advice?“ is a joined project with Johannes Koenen. Chapter 5 „Who lost the most? Financial Literacy, Cognitive Abilities, and the Financial Crisis“ is joint work with Michael Ziegelmeyer. Chapter 6 „Instant Gratification and Self-Control in an Experiment with Children and Teenagers“ is written jointly with Carsten Schmidt