Smart Money: The Effect of Education on Financial Behavior
Shawn Allen Cole
Harvard Business School
Anna L. Paulson
Federal Reserve Bank of Chicago
Gauri Kartini Shastry
University of Virginia
April 11, 2012
Harvard Business School Finance Working Paper No. 09-071
Household financial decisions are important for both households and the greater economy. Yet, our understanding of the process of financial decision-making is limited. Applying standard and two-sample instrumental variables strategies to census and credit bureau data, we provide the first precise, causal estimates of the effects of education on financial behavior. Education has large effects on financial market participation and smaller, but statistically and economically significant effects on financial management. We find that education improves credit scores, and dramatically reduces the probability of declaring bankruptcy or suffering foreclosure during the financial crisis. Examining mechanisms, we show that cognitive ability increases financial participation, and discuss how education may affect decision-making through: attitudes, borrowing behavior, discount rates, risk-aversion, and the influence of coworkers and neighbors.
Number of Pages in PDF File: 48working papers series
Date posted: December 17, 2008 ; Last revised: April 11, 2012
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