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Title: If You Are So Smart, Why Aren't You Rich? The Effects of Education, Financial Literacy and Cognitive Ability on Financial Market Participation

Citation Type: Miscellaneous

Publication Year: 2007

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Abstract: What determines whether an individual participates in Önancial markets? In particular, are those with more education, greater exposure to Önancial topics or higher cognitive ability more likely to invest in Önancial instruments? This is a di¢ cult question to answer, as each of these three factors is closely correlated with a host of other individual characteristics, such as parental income and ability, which may independently a§ect investment decisions. We use instrumental variables and panel regression techniques to overcome this identiÖcation challenge. To study the e§ect of general education, we make use of changes in compulsory education laws, which induce exogenous variation in schooling. To study Önancial literacy education in schools, we use cohort analysis and state laws mandating such education. Finally, we study cognitive ability by focusing on sibling pairs that grew up in the same household, therefore controlling for unobserved family characteristics. We Önd that greater cognitive ability and educational attainment lead to signiÖcant increases in Önancial market participation. However, and in contrast to previous Öndings, we Önd no evidence that high school Önancial literacy education a§ects savings or investment decisions.

Url: http://www.people.hbs.edu/scole/webfiles/savings.pdf

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Authors: Cole, Shawn; Kartini Shastry, Gauri

Publisher: Harvard University

Data Collections: IPUMS USA

Topics: Education, Labor Force and Occupational Structure, Other

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