HEC Research Papers Series,
HEC Paris

Abstract: This paper provides evidence for a causal effect of noncognitive abilities on financial distress. In a representative panel of households, we find that people in the bottom decile of noncognitive abilities are five times more likely to experience financial distress than those in the top decile. This relation arises largely from worse financial choices and lack of financial insight by low-ability individuals, and only to a lesser degree reflects differential exposure to income shocks. We account for potential confounding factors including preferences, cognitive abilities, and demographics. Implications for policy and finance research are discussed.

Keywords: Noncognitive abilities; financial distress; financial choices; behavioral finance; psychology and economics

JEL-codes: D10; D14; G41

57 pages, First version: March 1, 2017. Revised: August 7, 2017.

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