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Cognitive abilities, self-efficacy, and financial behavior

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  • Tang, Ning

Abstract

This paper investigates the effect of cognitive abilities on financial behavior among older adults. Using the U.S. Health and Retirement Study, I find that cognitive abilities significantly affect financial behavior through two channels: ability and self-efficacy. People with higher cognition scores achieve better financial outcomes. This positive association is especially strong in tasks having high demand of cognitive abilities, which confirms the ability channel of the cognitive ability effect. In addition, there is evidence for the self-efficacy channel as a secondary source of cognitive influence. Lower cognitive abilities decrease people’s sense of self-efficacy, which, in turn, significantly decreases financial management efficiency. The findings have important policy implications, specifically that more effort is needed to assist the growing older population through the cognitive aging process and that noncognitive skills, as a secondary source of influence, also warrant attention.

Suggested Citation

  • Tang, Ning, 2021. "Cognitive abilities, self-efficacy, and financial behavior," Journal of Economic Psychology, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:joepsy:v:87:y:2021:i:c:s0167487021000787
    DOI: 10.1016/j.joep.2021.102447
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    More about this item

    Keywords

    Cognition; Self-efficacy; Personal finance; Older population;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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