Evaluating Deliberative Competence: A Simple Method with an Application to Financial Choice

Abstract

We introduce a method for measuring the quality of financial decisions built around a notion of financial competence, which gauges the alignment between consumers choices and those they would make if they properly understood their opportunities. We prove our measure admits a formal welfare interpretation even when consumers suffer from additional decision-making flaws, known and unknown, outside the scope of analysis. An application illuminates the pitfalls of the types of brief rhetoric-laden interventions commonly used for adult financial education: they affect behavior through unintended mechanisms, and hence may not improve decisions even when they perform well according to conventional metrics.

Behavioral Public Economics

“…Notice also that the factor of proportionality does not depend on the instrument under consideration, z. Ambuehl et al (2017) prove under much more general conditions that these properties hold to a rst-order approximation for small instruments (e.g., even when true preferences involve an arbitrary function v that diers from u).…”

“…Unfortunately, welfare analyses that abstract from the pervasiveness and multiplicity of framing eects and biases arguably overlook critical second-best considerations (in the sense of Lipsey and Lancaster, 1956-57) that could overturn their implications. Ambuehl et al (2017) refer to this approach as idealized welfare analysis, to indicate that it treats sources of ineciency outside the scope of the analysis as if other policies will provide ideal resolutions. The main advantage of the approach is that it provides a coherent justication for compartmentalization, at least in cases where there are good solutions for each compartmentalized problem: the planner can focus on one problem at a time, and still achieve the overall optimum.…”

“…At rst, it might appear that idealized welfare analysis requires a deep understanding of all decision-making aws and their solutions, because it references judgments made in an idealized setting, rather than actual decisions. However, Ambuehl et al (2017) show that it is sometimes possible to approximate idealized welfare eects using actual choice data, even if one has no information concerning the existence or nature of other biases that may aect those choices.…”

“…Methods for evaluating the quality of nancial decision making In principle, one can empirically evaluate the quality of decision making in the nancial domain using any of the strategies discussed in Section 2.2.4. For example, Ambuehl et al (2017) deploy the strategy of implementing reframed decision problems. They introduce a measure of nancial competence based on discrepancies between choices in equivalent valuation tasks.…”

Enhancing Financial Literacy – Experiment Results

“…Many studies of financial capability, financial literacy and financial education show that financial education has a positive impact on consumer behaviour and financial welfare. Lower levels of measured financial literacy are associated with lower rates of planning for retirement, lower rates of asset accumulation, lower participation in the stock market, higher rates of using alternative financial services and higher levels of debt (Ambuehl, Bernheim & Lusardi 2014, Brown et al 2014Xiao & O'Neill 2016). In order to examine the impact of financial education on financial knowledge, an experiment was carried out.…”