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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. We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement wellbeing would do well to consider the importance of both factors.
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Opinions and errors are solely those of the authors and not of the institutions providing funding for or with which the authors are affiliated. ©2018 Hastings and Mitchell. All rights reserved.
Excellent research assistance was provided by Eric Chyn, Fabian Duarte, Raissa Fabregas, Peter Frerichs, Daniela Fuentes, Sarah Johnston, Carolina Orellana, José Luis Ruiz, and Javiera Vásquez. The authors thank David Bravo, Fabian Duarte, Raissa Faibregas, Peter Frerichs, Daniela Fuentes, Carolina Orellana, Sandra Quijada, and Javiera Vasquez for helpful comments.
Date Posted: 06 February 2019