Social Transmission of Financial Decision Making Skills. A Case of the Blind Leading the Blind?
30 Pages Posted: 31 Dec 2016 Last revised: 23 Jan 2017
Date Written: January 2, 2017
Often, people consult with others for advice before they make financial decisions. Previous research argues that such communication amounts to a case of the blind leading the blind. In this paper, we document that it can be beneficial, and explore mechanisms. In our laboratory experiment, subjects make private decisions about investments involving compound interest both before and after they communicate with a randomly assigned partner. Communication not only improves decision making for the specific tasks they have sought advice about, but subjects successfully generalize these skills to novel decision problems. We find that communication is most beneficial when pair members’ skills are at similar levels — the transmission of financial competence requires a common language, and is not merely a case of information flowing from those who have it to those who do not. Finally, communication leads subjects to reevaluate their privately revealed time preferences. Discount rates move towards the communication partners’ rate, and do so to a larger extent if the partner is more patient. We suggest policies to improve the quality of financial decision making.
Keywords: Communication, Financial Literacy, Financial Competence, Behavioral Welfare Eco- nomics, Experimental Economics, Exponential Growth Bias
JEL Classification: D03, D12, D69, G02
Suggested Citation: Suggested Citation