Noncognitive Abilities and Financial Delinquency: The Role of Self‐Efficacy in Avoiding Financial Distress

Abstract

We investigate a novel determinant of financial distress, namely, individuals' self‐efficacy, or belief that their actions can influence the future. Individuals with high self‐efficacy are more likely to take precautions that mitigate adverse financial shocks. They are subsequently less likely to default on their debt and bill payments, especially after experiencing negative shocks such as job loss or illness. Thus, noncognitive abilities are an important determinant of financial fragility and subjective expectations are an important factor in household financial decisions.

Repeated payment delinquency among young adults in the United States

“…Standard economic models suggest that debt repayment is a trade‐off between remaining solvent by forgoing other spending or increasing labour market participation or defaulting and facing the aforementioned negative consequences (Chatterjee, Corbae, Nakajima, & Rios‐Rull, ). However, research in a diverse range fields are finding that this not a straightforward economic trade‐off (Hodson, Dwyer, & Neilson, ; Kuhnen & Melzer, ; Xu, Beller, Roberts, & Brown, ). For example, Getter () considers whether payment delinquency is due to economic shocks or from “excessive” household spending and mounting financial stress.…”

“…Research exploring payment delinquency has focused on economic determinants such as income shocks (Elul, Souleles, Chomsisengphet, Glennon, & Hunt, ; Getter, ; Keys, ); social determinants such as socioeconomic status, education and gender (Hodson et al, ; Oksanen, Aaltonen, & Rantala, ); structural issues such as insolvency laws (Fay, Hurst, & White, ); and more recently behavioural factors such as personality traits and self‐efficacy (Kuhnen & Melzer, ; Peijnenburg & Parise, in press; Xu et al, ).…”

“…Individuals with higher self‐efficacy are less likely to be delinquent on loans and more likely to practice good financial behaviours such as saving regularly, purchasing insurance and planning for retirement. They are also less likely to become delinquent following a negative shock such as job loss or an illness (Kuhnen & Melzer, ). A study examining the relationship between financial distress and personality traits found that conscientiousness consistently had a negative correlation with measures of financial distress, while neuroticism consistently had a positive correlation (Xu et al, ).…”

Financial Literacy and Self-Control in FinTech: Evidence from a Field Experiment on Online Consumer Borrowing

“…Firstly, we add to a large and established literature which analyzes the link between financial literacy and household financial decision making. One aspect of this literature initially focused on financial aptitude or cognitive skills in financial decision making (e.g., Grinblatt, Keloharju, and Linnainmaa, 2011; or see Lusardi and Mitchell, 2014 for a recent review of the literature), while another has examined the link between non-cognitive skills and behavior and financial distress, debt-behavior, and poor financial decision making (Thaler and Shefrin, 1981;Heidhues and Kőszegi, 2010;Kuhnen and Melzer, 2018;Parise and Peijnenburg, 2018;Kuchler and Pagel, 2019). Our results contribute to this stream of the literature by showing the relative contribution of knowledge on financial topics and non-cognitive skills such as self-control on financial behavior in the field.…”

“…For recent reviews of the literature on financial literacy and education seeLusardi and Mitchell (2014) andFernandes, Lynch, and Netemeyer (2014) 4. For example,Americks and Leahy (2003),Americks et al (2007),Meier and Sprenger (2010),Gathergood (2011),Kuhnen and Melzer (2018), andParise and Peijnenburg (2018).Electronic copy available at: https://ssrn.com/abstract=3469571…”