Smart Money? The Effect of Education on Financial Outcomes

Abstract

Household financial decisions are important for household welfare, economic growth and financial stability. Yet, our understanding of the determinants of financial decision-making is limited. Exploiting exogenous variation in state compulsory schooling laws in both standard and two-sample instrumental variable strategies, we show education increases financial market participation, measured by investment income and equities ownership, while dramatically reducing the probability that an individual declares bankruptcy, experiences a foreclosure, or is delinquent on a loan. Further results and a simple calibration suggest the result is driven by changes in savings or investment behavior, rather than simply increased labor earnings. AbstractHousehold financial decisions are important for household welfare, economic growth and financial stability. Yet, our understanding of the determinants of financial decision-making is limited. Exploiting exogenous variation in state compulsory schooling laws in both standard and two-sample instrumental variable strategies, we show education increases financial market participation, measured by investment income and equities ownership, while dramatically reducing the probability that an individual declares bankruptcy, experiences a foreclosure, or is delinquent on a loan. Further results and a simple calibration suggest the result is driven by changes in savings or investment behavior, rather than simply increased labor earnings.2

Child Health, Human Capital and Adult Financial Behavior

“…In line with the empirical household finance literature, the estimated education coefficients increase in attained grade (e.g. Cole et al, 2014). Conditional on skills, the adult measures of health (column 4) and total household labor income 18…”

“…Vissing-Jorgensen (2002) and Calvet and Sodini (2014) confirm the positive theoretical relationship between human capital (discounted future income) and financial risk-taking using U.S. data from the PSID and Swedish register data on twins. Other works affirmed the positive relationship between human capital and financial risk-taking using Cunha and Heckman (2007)'s cognitive (Christelis et al, 2010;Grinblatt et al, 2011;Agarwal and Mazumder, 2013) and/or non-cognitive skills (Hong et al, 2004;Luik and Steinhardt, 2016) 3 , or education (Campell, 2006;Cole et al, 2014).…”

“…In order to enter these higher income trajectories, education signals unobservable skills to employers. However, according to Cole et al (2014), this is not the only channel at play. Regarding financial behavior, education increases awareness via courses with financial curriculum or 16 The difference between lower and upper bound is the addition of controls for (non)cognitive skills which partially confound and mediate our effect.…”

Financial Education, Literacy and Investment Attitudes

“…The school students. Cole et al (2014) report no direct effect of mandatory education on financial attitudes, exploiting cross-state variations. treatment group receive a short course on basic financial concepts, the control an arguably orthogonal course on the history of Venetian lagoon.…”

How effective is compulsory schooling as a policy instrument?

“…Interestingly, these results control for whether or not the student has studied financial literacy at school through courses in personal finance, but this additional training does not have a significant impact on financial decision making. This implies that the mechanism for improved financial decision making rests with changes in numeracy and basic mathematics/statistics capacity-the additional schooling from changes in compulsory levels has an impact through enhanced numeracy [12].…”