Smart Money: The Effect of Education on Financial Behavior

48 Pages Posted: 17 Dec 2008 Last revised: 22 Jun 2016

Shawn Allen Cole

Harvard Business School

Anna L. Paulson

Federal Reserve Bank of Chicago

Gauri Kartini Shastry

University of Virginia

Date Written: April 11, 2012

Abstract

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.

Suggested Citation

Cole, Shawn Allen and Paulson, Anna L. and Shastry, Gauri Kartini, Smart Money: The Effect of Education on Financial Behavior (April 11, 2012). Harvard Business School Finance Working Paper No. 09-071. Available at SSRN: https://ssrn.com/abstract=1317298 or http://dx.doi.org/10.2139/ssrn.1317298

Shawn Allen Cole (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Anna L. Paulson

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312 322 2169 (Phone)

Gauri Kartini Shastry

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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