Education, Human Capital, and
Financial Decision
University of Maryland
Jinhee Kim
SFEPD
October 26, 2015
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Education and Financial Decisions
• Education is controlled as socioeconomic “status.”
• However, the causal role of education in other outcomes
such as health has been established in demography or
social epidemiology independent of status attainment
(Baker, Leon, Greenaway, Collins, & Movit, 2011).
• “Education has an enduring, consistent, and growing
effect” (Mirowsky & Ross, 2003).
• Causal effect of education on financial decision?
– Correlation by unobservable characteristics
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Education and Financial DecisionMaking
Education
Income
Financial Decision
•Increase steady employment
•Increase wage rates
•Decrease poverty
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Education, Asset Ownership, and
Wealth
• Education is positively associated with asset
ownership and wealth.
• Education is associated with investment asset
ownership among low to moderate income
households (Gutter, et al., 2012).
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Financial Literacy by Education Group
Source: Lusardi & Mitchell: The Economic Importance of Financial Literacy
Journal of Economic Literature, Vol. LII (March 2014)
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The Causal Effects of Education on
Financial Decision
• Education increases financial market participation and
reduces the probability that an individual declares
bankruptcy, experiences a foreclosure or is delinquent (Cole,
Paulson, & Shastry, 2014). Individuals with higher education
are more likely to participate in the stock market, accumulate,
any return-yielding assets, and stay current with their credit
cards.
• The causal effect of education on stock market participation
and risky asset holdings was estimated using the Swedish
data. An extra year of education increases stock market
participation by about 2% for men but there is no evidence of
any positive effect for women (Black, Devereux, Lundborg, &
Majlesi, 2015) .
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Educational Attainment
Cognitive Factors
Psychological
Factors
Family
Background
Educational
Attainment
Other External
Conditions
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Intergenerational Transmission of
Education
• Educational attainment is an intergenerational transmission
of family background as well as individual’s ability (Huang,
2013).
• Family income, assets, and education influence children’s
academic achievement and academic aspiration and
educational attainment (Elliott, Kim, Jung, Zhan, 2010) .
• Family structure plays role in intergenerational transmission
of education (Martin, 2011).
• Racial/ethnic minority and low resources households (Robert
Wood Johnson Foundation, 2013).
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Intergenerational Education Mobility
Authors: Richard V. Reeves and Joanna Venator | October 27, 2014
The Inheritance of Education
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Education and Financial Decision
• Is education same as cognitive ability?
• Does education simply reflect underlying
psychological traits such as an orientation toward
the future, traits which might lead them to do
well across multiple important life domains such
as impatience?
• Or does the effect of education result from actual
cognitive gains associated with schooling? (Herd,
2010)
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Education, Human Capital, and
Financial Decisions
Financial Decisions
Education
Human Capital
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Human Capital Pathways
Psychological Factors
Future Orientation, Impatience/ Self-regulation,
Self-efficacy
Neurological and Cognitive Factors
High-order cognition, Numeracy, Literacy
Education
Social Capital
Connections and contacts, Peer effects, trust
Health
Morality, Morbidity, Health disparities
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Education, Neurological and Cognitive
Skills, and Financial Decision
Education
Financial Decision
Neurological and
Cognitive Skills
•High-order
cognition
•Numeracy
•Literacy
•Risk Assessment
•Decision Making
Skills
“Activity-dependent
development” or
“neural plasticity”
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Neurological and Cognitive Impacts
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Education is regarded as a proxy of cognitive reserve (Stern, 2002; staff, Murray,
Deary, & Whally, 2004).
Higher cognitive skills “thinking skills, reasoning, critical thought, and problem
solving”
“Executive Functions” refers to the higher-level cognitive skills you use to control
and coordinate your other cognitive abilities and behaviors.
Neurological development of high-order cognitive skills occurs through late
adolescence and is highly responsive to environmental stimulation (Baker, Leon,
Greenaway, Collins, & Movit, 2011). “Neural plasticity”
High-order cognition is associated with risk assessment and decision making skills
(Bruine de Bruin et al., 2007).
Executive function such as inhibition, working memory, and cognitive flexibility is
linked to financial decisions (Drever et al., 2015).
Schooling can have long-lasting effects on neurological functioning (Quartz &
Sjenowski, 1997). Education enhances high-order cognition (Baker et al., 2011) and
executive functions (Debora et al., 2013; Wecker et al., 2005).
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Education, Psychosocial Factors, and
Financial Decision
Education
Psychosocial
Factors
Financial Decision
Self-efficacy
Time-horizon
Selfcontrol/impatience
Power
Perceived barriers
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Psychological Factors, Education, and
Financial decisions
• Psychological non-cognitive attributes may be
genetic endowment that mediates the
relationship between education and financial
decision. However, through schooling
psychological factors change across the life
course (Herd, 2010).
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Education and Self-Efficacy
•
The extent or strength of one's belief in one's own ability to complete tasks
and reach goals (Bandura, 1997) . Self-efficacy affects cognitive, affective, and
motivational processes. Self-efficacy can affect how people think, feel, and act
(Bandura, 1997).
•
Self-efficacy affects accomplishment directly and indirectly through its
influence on the belief that one can achieve one’s goals.
•
The effects of self-efficacy on academic achievement and performance have
been well established. Self-efficacy also has been linked to goal setting and
performance (Zimmerman et al., 1992).
•
Higher education was associated with higher self-efficacy and high cognitive
skills (Zahodne et al., 2015).
•
Self-efficacy can be a protective factor. High levels of self-efficacy may buffer
the negative effects of low education on executive functioning (Zahodne et al.,
2015). Individuals with low education but high self-efficacy performed
similarly to individuals with high education.
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Financial Self-efficacy
• Social Cognitive Perspective emphasizes domain specific selfefficacy in relation to specific performance such as economic selfefficacy or education self-efficacy.
• Financial self-efficacy is a sense of one’s ability to perform
responsible financial behaviors contribute to the performance of
those behaviors (Serido et al., 2013).
• Financial efficacy can be used to influence individuals’ financial
behaviors (Serido et al.,2013) such as savings (Lown et al., 2015),
credit management (Wang et al., 2011), and retirement investing
(2007)
• Financial self-efficacy can be additional financial capability that
motivate financial behaviors.
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Enhancing Self-Efficacy
• Self-efficacy beliefs are developed by four sources: mastery
experience, vicarious experience, verbal persuasion, and
physiological state (Alderman, 1999; Bandura; 1986).
• Strategies to improve students’ self-efficacy towards
learning include modeling, sharing of self-efficacy stories,
constructive feedback, goal setting, rewards, and
estimating student self-efficacy by using a scale (Alderman,
1999; Schulze & Schulze, 2003 ).
• A recent research suggests activities, exercises and financial
video games help students acknowledge and enhance selfefficacy (Maynard et al., 2012).
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Other Psychosocial Factors
•
In addition to objective knowledge, subjective knowledge in consumer financial
decisions can be important consumer’s investing behavior (Hadar et al., 2013). The
effort of financial education may actually undermine consumer’s level of
subjective knowledge. If too much information is presented in a highly technical
format, consumers may be deterred from those investment options and take no
actions or choose inferior alternatives.
•
Personal trait such as impatience can affect educational attainment as well as
financial decisions (Cadena & Keys, 2015). Impatient people more frequently
invest in dynamically inconsistent ways, such as dropping out of college with one
year or less remaining. They estimated the cumulative investment differences may
cost 13% less in earning for the impatient. Self-regulation and soft skills are
important in education and other time-dependent investment decisions (Cadena &
Keys, 2015).
•
Perceived barriers is associated with savings among low to moderate income
(Mauldin et al., 2013).
•
Feeling powerful also increases saving (Garbinsky et al., 2014).
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Health and Education
• Education impacts longevity, disease, health disparities.
• For health disparity, improving socioeconomic conditions such as
education is one of the strategic areas that HHS, CDC, and other
federal agencies identified (Beckeles & Truman, 2013).
• National Prevention Strategy targets education as to boost health
and decrease health disparity (Robert Wood Johnson Foundation,
2013). For example, effective evidence-based interventions to
prevent and reduce the dropouts of middle and high school student
can decrease health disparity.
• Wealth disparity?
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Averaged Freshman Graduation Rate (AFGR) for
public high school students, by race/ethnicity: School
year 2011–12
U.S. Department of Education, National Center for Education Statistics
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Status dropout rates of 16- through 24-yearolds, by race/ethnicity and sex: 2012 National
Center for Education Statistics
U.S. Department of Education, National Center for Education Statistics
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Race and Educational Attainment
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Who Has Student Loan Debt?
Caroline Ratcliffe and Signe-Mary McKernan, The Urban Institute
Based on the 2012 National Financial Capability Study
Forever in Your Debt Who Has Student Loan Debt, and Who’s Worried?
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Implications for Financial Educators
• Education may have effects on financial decision
other than wage earnings.
• Possible pathways include human capital:
– Cognitive, psychosocial, social capital, and health
• Financial educators may consider both cognitive
and psychosocial factors in influencing
individuals’ financial decisions as they may buffer
adverse effects of low education on financial
decisions.
• Strategies to enhance cognitive and psychosocial
factors can be utilized in financial education.
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