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 language||English (US)|
|Number of pages||29|
|State||Published - Jan 2014|