Cognitive Abilities, Self-Efficacy, and Financial Behavior
By Ning Tang
This paper investigates the effect of cognitive abilities on financial behavior among older adults. Using the longitudinal dataset of the Health and Retirement Study, I find that cognitive abilities significantly affect financial behavior through two channels: ability and self-efficacy. People with higher cognition scores, who presumably are more capable of processing information and analyzing problems, achieve better financial outcomes. This positive association is especially strong in tasks having high demand of cognitive ability, which confirms the ability channel of the cognitive ability effect. In addition, there is evidence for the self-efficacy channel as a secondary source of cognitive influence. Lower cognitive abilities decrease people’s belief in their capacity to control and influence their life, and lower self-efficacy significantly decreases financial management efficiency. The results from various robustness tests exclude the possibility that the main results are driven primarily by reverse causality, endogeneity, family background or sample selection bias. The findings have important policy implications, specifically that more effort is needed to assist the growing older population through the cognitive aging process and that noncognitive skills, as a secondary source of influence, also warrant attention.
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