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A new study seems to confirm the adage that older means wiser, at least when it comes to making decisions about economic matters. From ScienceDaily:
To conduct their research, [Ye] Li and his colleagues recruited a group of 336 people — 173 younger (ages 18 to 29) and 163 older (ages 60 to 82) — and asked them a series of questions that measured economic decision making traits. They also administered a battery of standard fluid and crystallized intelligence tests.
These traits included temporal discounting (how much people discount future gains and losses), loss aversion (how much the valuation of losses outweigh gains of the same magnitude), financial literacy (understanding financial information and decisions) and debt literacy (understanding debt contracts and interest rates).
They found the older participants performed as well or better than the younger participants in all four decision-making measures. The older group exhibited greater patience in temporal discounting and better financial and debt literacy. The older participants were somewhat less loss averse, but the result did not reach standard levels of significance.
“The findings confirm our hypothesis that experience and acquired knowledge from a lifetime of decision making offset the declining ability to learn new information,” Li said.
(HT: R.E. Riker)
Annamaria Lusardi, whose ground-breaking research on financial literacy has been featured here several times, has put out a new working paper (with co-authors Pierre-Carl Michaud and Olivia S. Mitchell) that could be read as laying much of the blame for the lack of household wealth at the foot of the members of said household. The paper is called “Optimal Financial Knowledge and Wealth Inequality” (abstract; PDF):
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While financial knowledge is strongly positively related to household wealth, there is also considerable cross-sectional variation in both financial knowledge and net asset levels. To explore these patterns, we develop a calibrated stochastic life cycle model featuring endogenous financial knowledge accumulation. The model generates substantial wealth inequality, over and above that of standard life cycle models; this is because higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with precautionary saving motives, boost their need for private wealth accumulation and thus financial knowledge.
Our simulations show that endogenous financial knowledge accumulation has the potential to account for a large proportion of wealth inequality.
Steven LEVITT: Hi, this is Steve Levitt. Stephen J. DUBNER: And I’m Stephen Dubner. Thanks for downloading this “Freakonomics Radio” podcast. LEVITT: When we started this a couple years ago, I never imagined we would still be making podcasts two years later. DUBNER: And to your great chagrin, or to your great joy, we are? […] Read More »
Freakonomics fans will already know that financial literacy is a hot issue for researchers – it’s in everybody’s best interest to get people making better financial decisions, but frankly, we’re not terribly good at it. The natural response is that if you just explain to people how to make better decisions, they’ll do it, but as we’ve heard in the podcast, it ain’t necessarily so. Just taking rational, clear-thinking adults and explaining how to make better financial decisions makes them feel good, but doesn’t necessarily help them make better decisions.
So we wondered if we could fix the problem by backing up the process and starting early, when kids were still in school. And we decided to do it in a place where people can use all the financial help they can get – Ghana, which has one of the lowest savings rates in Africa. Read More »
Season 2, Episode 5
Our latest podcast is called “Lottery Loopholes and Deadly Doctors.” (Download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.) This is the final episode of five one-hour Freakonomics Radio specials that have been airing on public radio stations across the country. (Check here to find your local station.)
These hour-long programs are “mashupdates” — that is, mashups of earlier podcasts which we’ve also updated with new interviews, etc.
In two weeks, we’ll start releasing a series of brand new podcasts. Among the topics to listen for: the selling of souls, the value of college, and the strategic use of jerkitude (that is, acting like a jerk). Read More »
Stephen J. DUBNER: There’s something Peter Tufano wants to know about you: “If you had to, could you come up with $2000 in 30 days?” That’s the question he asked a whole bunch of people in 13 countries, including the U.S. Peter TUFANO: Why $2000? Because an auto transmission is about fifteen hundred. Most estimates […] Read More »
We’ve banged the drum quite a bit on the need for greater financial literacy. If you care about such things, you might want to take a look at a new working paper by Pierluigi Balduzzi and Jonathan Reuter called “Heterogeneity in Target-Date Funds and the Pension Protection Act of 2006″ (abstract; PDF).
That isn’t the sexiest title ever, and if you don’t care at all about personal finance or investing then you probably shouldn’t go near it. But if you care even a little bit, the paper has some interesting lessons even beyond the fairly narrow focus of Target-Date Funds. A Target-Date Fund is, in a nutshell, a mutual fund whose asset allocation automatically shifts over time as the target date approaches. Read More »
A reader named Philip Serghini writes in:
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It would be an interesting experiment if (in, say, Buffalo) every kid entering the first grade were given a $100 savings deposit (paid for by a private foundation). They wouldn’t be allowed to withdraw the money at any time up until they graduate, but they’d be able to add if they wanted. Each grade they ascended, another $100 would be added. If you dropped out or failed out, you’d forfeit everything (except anything you’d voluntarily put in). By the time they graduated from high school, each student would have saved a nice tidy sum to spend as they please: college, car, suit.