2014 Conference

The recent economic crisis has brought into stark reality the inadequacy of financial literacy in the United States. For example, many people borrowed on mortgages that they could not sustain and thus ended up in default or foreclosure. Following the recent work on non-cognitive skills (Heckman et al., 2006; Borghans et al., 2008; Almlund et al., 2011), we propose to adapt an interdisciplinary approach at the borders of economics, psychology, and finance to investigate the new question of the role of personality in such financial decisions for a sample of young adults born in the late 1970s. The National Longitudinal Study of Adolescent Health (Add Health) dataset uniquely combines individual personality measures with financial choices. It contains data in Waves I (1994-95) and IV (2007-08) on the “Big Five” personality traits: extraversion, neuroticism, conscientiousness, agreeableness, and openness to experience. We will use those traits available in adolescence as instrumental variables for personality traits in young adulthood when the financial decisions are made. The poor financial outcomes of the adults include high debt ratios, unaffordable home mortgages, and missing bills, which we consider as proxies for financial literacy. Our unique data allows us to explore several potential mechanisms by which personality can affect financial decision-making, including risk preferences, time preferences, peer effects, and mental health. We will also account for individual cognition, measured by math scores recorded in grades 7-12 at the Wave I interview, as well as constraints and incentives associated with financial decisions, measured by household income. The identification of causality between personality and financial decision-making can lead to important policy implications, whereby personality interventions in childhood can be used as an innovative approach to head off the over-indebtedness and other financial difficulties faced by U.S. households.