Financial Decision Power and Household Wealth: The Role of Personality and Cognitive Ability

Abstract

This paper studies the how financial decision power is allocated within a household and how it is related to wealth production. Evidence from the Health and Retirement Study (HRS) shows that both the absolute and relative values of husband’s and wife’s personality and cognitive ability predict financial decision power allocation. This is in line with a view of comparative advantage in that whoever has the suitable characteristics for financial decision-making that facilitates wealth production should assume the responsibility. In addition, personality and cognitive ability predict household wealth based on financial decision power role and gender. Inefficient financial decision-making power allocation decreases wealth especially financial wealth, indicating the importance of choosing a person with suitable endowments for financial wealth management.