Financial Responsibility, Personality Traits and Financial Decision ...

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formulation, this life-cycle framework asserts that agents make sequential decisions to achieve a coherent goal using all the information that is available to them. Along these lines, households ought to have active savings management that helps them to smooth- ing out their consumption over their lifespan. Over the years this life-cycle model has been extended and enriched, allowing for potentially important features such as habits, imperfection in capital markets, disagreements between husbands and wives about how much to save, limited computational powers, and discounting of the future that changes over time . An expanding body of mostly normative literature has evolved in this field, to explain how households should behave to obtain optimal savings behavior and port- folio choice over the life cycle. In his seminal work on household finance, Campbell (2006) compared what we know about what households actually do with our body of knowledge about what households should do. He argues that although many households find adequate solutions to the complex investment problems they face, some households make serious investment mistakes. These mistakes are made more often by poorer and less educated households, supporting the recent call for financial education and stricter consumer regulations. The lack of financial literacy among some consumers was first documented by Bernheim (1995, 1998). Hilgert et al (2003) report that most Americans fail to understand basic financial concepts, particularly those related to bonds, stocks, and mutual funds. Lusardi and Mitchells (2006) module on planning and financial literacy of the 2004 Health and Retirement Study (HRS) show that many older individuals cannot do simple interest-rate calculations, and do not understand inflation. Using a financial literacy construct based on a small set of numerical exercises, they conclude that financial literacy is very low among women, those with low educations and Afro- Americans and Hispanics. As a result, these financial illiterates fail to plan and save 6
for their retirement, and thereby run the risk of falling short later in life. Recent work by Huston (2010) sheds new light on measurement issues regarding financial literacy and knowledge. Important here is the distinction between two dimensions understanding (personal finance knowledge) and use (personal finance application). Most of the available literature on financial literacy is focused on the first, the understanding, and relates the variation in financial understanding to a set of demographics. Alternatively, in the field of psychology various behavioral factors have been identified that explain use, and effectively may help us to understand why some households plan and actually save for retirement while other do not. Thaler (1994) and Levin (1998) have incorpo- rated behavioral aspects as bounded rationality, limited self-control, and the fungibility of assets, into the life-cycle model. An important concept in this area is the locus of control the extent to which individuals believe that they can control events that af- fect them. This concept was first developed by Rotter (1966) and became popular in behavioral psychology. Although the concept and the various scales measuring it have been subjected to extensive assessment and criticism, it has been applied in various ar- eas of health science, religious beliefs and behaviors, political sciences and educational settings . So far, this locus of control has not been applied in the financial literature on household finance. In this paper, we integrate the locus of control concept into an empirical analysis of household savings. We build on the available work on life-cycle models and financial literacy by applying a framework that considers both demographics, upbringing, skills, but perhaps most notably a set of personality variables that can help our understanding of why the use of personal finance knowledge. 7
Page 1 and 2: Financial Responsibility, Personali
Page 3 and 4: decisions through their understandi
Page 5: literacy test are 38% more likely t
Page 9 and 10: In total, the survey consists of 62
Page 11 and 12: e good at mathematics, and merely 1
Page 13 and 14: looked at in detail later, and is o
Page 15 and 16: striking are the low scores that we
Page 17 and 18: these two household demographics re
Page 19 and 20: savers, the only interaction effect
Page 21 and 22: References [1] Berman, A. and T. Ha
Page 23 and 24: [19] Modigliani, F., Brumberg,R., 1
Page 25 and 26: Table 1: Summary statistics Total s
Page 27 and 28: Table 3: Robustness test of savings
Page 29 and 30: Table 5: Logit regressions on obser
Page 31 and 32: % Savers 60 50 40 30 20 10 0 Male F
Page 33 and 34: - It is hard to find a good financi
Page 35 and 36: C Financial Literacy Mean Stdev Min
Page 37 and 38: 100% 80% 60% 40% 20% 0% > 1960 1945

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