Non-Cognitive Abilities and Loan Delinquency

Camelia M. Kuhnen, Brian T Melzer

Research output: Working paper

Abstract

Research on household financial decisions has largely focused on the importance of cognitive abilities in decision-making, emphasizing for example that IQ and math ability predict stock market participation and the avoidance of financial mistakes. This paper takes a broader perspective by exploring the role of non-cognitive abilities in household borrowing and default decisions. Within the fields of labor and education economics, noncognitive traits such as self-efficacy – the perceived ability to control one’s future outcomes – predict substantial differences in school achievement and employment outcomes. Using longitudinal household survey data, we show that an individual’s self-efficacy during childhood also predicts differences in future delinquency on debt and bill payments. The effect of self-efficacy on delinquency is both substantial and robust; a one standard deviation increase in self-efficacy corresponds to a 15-20% decrease in the likelihood of delinquency, and this effect is not explained by differences in gender, race, cognitive ability, educational attainment and income, contemporaneous or past.
Original languageEnglish (US)
Number of pages29
StatePublished - Jan 2014

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