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Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel

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  • Peijnenburg, Kim
  • Parise, Gianpaolo

Abstract

This paper provides evidence for a causal effect of noncognitive abilities on financial distress. 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 than those in the top decile. This relation arises largely from worse financial choices and lack of financial insight by low-ability individuals, and only to a lesser degree reflects differential exposure to income shocks. We account for potential confounding factors including preferences, cognitive abilities, and demographics. Implications for policy and finance research are discussed.

Suggested Citation

  • Peijnenburg, Kim & Parise, Gianpaolo, 2017. "Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel," HEC Research Papers Series 1193, HEC Paris, revised 07 Aug 2017.
    • Handle: RePEc:ebg:heccah:1193
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    Keywords

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

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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