Cognitive Abilities and Household Financial Decision Making

Agarwal, Sumit; Mazumder, Bhashkar

doi:10.1257/app.5.1.193

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American Economic Journal: Applied Economics: Vol. 5 No. 1 (January 2013)

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Cognitive Abilities and Household Financial Decision Making

Article Citation

Agarwal, Sumit, and Bhashkar Mazumder. 2013. "Cognitive Abilities and Household Financial Decision Making." American Economic Journal: Applied Economics, 5(1): 193-207.

DOI: 10.1257/app.5.1.193

Abstract

We analyze the effects of cognitive abilities on two examples of consumer financial decisions where suboptimal behavior is well defined. The first example features the optimal use of credit cards for convenience transactions after a balance transfer and the second involves a financial mistake on a home equity loan application. We find that consumers with higher overall test scores, and specifically those with higher math scores, are substantially less likely to make a financial mistake. These mistakes are generally not associated with nonmath test scores. (JEL D14, G21)

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Authors

Agarwal, Sumit (National U Singapore)
Mazumder, Bhashkar (Federal Reserve Bank of Chicago)

JEL Classifications

D14: Personal Finance
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages

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