How Financial Literacy And Impatience Shape Retirement Wealth And Investment Behaviors
Source: Yale University
Two competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs. The authors use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Their results show that their measure of impatience is a strong predictor of wealth and investment in health.