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Understanding the determinants of financial outcomes and choices: the role of noncognitive abilities

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  • Gianpaolo Parise
  • Kim Peijnenburg

Abstract

We explore how financial distress and choices are affected by noncognitive abilities. Our measures stem from research in psychology and economics. In a representative panel of households, we find that people in the bottom decile of noncognitive abilities are five times more likely to experience financial distress compared to those in the top decile. Relatedly, individuals with lower noncognitive abilities make financial choices that increase their likelihood of distress: They are less likely to plan for retirement and save, and more likely to buy impulsively and to have unsecured debt. Causality is shown using childhood trauma as an instrument.

Suggested Citation

  • Gianpaolo Parise & Kim Peijnenburg, 2017. "Understanding the determinants of financial outcomes and choices: the role of noncognitive abilities," BIS Working Papers 640, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:640
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    2. OKUBO Toshihiro & Alexander F. WAGNER & YAMADA Kazuo, 2017. "Does Foreign Ownership Explain Company Export and Innovation Decisions? Evidence from Japan," Discussion papers 17099, Research Institute of Economy, Trade and Industry (RIETI).

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    More about this item

    Keywords

    Noncognitive abilities; financial distress; financial choices; saving; unsecured debt; behavioral finance; psychology and economics;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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