The Effects of Education on Behavioral Decision-Making

University Of Southern California, Los Angeles CA

Investigators

Abstract

This award funds research that will help us understand how education affects the financial decisions people make. The focus here is not on targeted education about retirement and investing, but general higher education. The research team will accomplish this by comparing a group of college students to comparable students with the same academic background and accomplishments who had to delay college enrollment. The research team will examine whether the college-educated participants make more consistent decisions over time, whether they are more or less likely to gamble on small risks, and whether they are less likely to use inaccuarate rules-of-thumb in financial decision making. results of the project will yield broader impact by giving new evidence on how education may help encourage retirement saving and long-run investments in health and well-being. Past research has established that individuals often behave in ways that inconsistent with some of the key assumptions used in economic models. In particular, they may be time-inconsistent, have attitudes toward rsik that depend on reference points or question framing, and have systematically incorrect beliefs. Such behaviors may explain why some households have inadequate savings for retirement, the sensitivity of demand for annuities to framing, individuals over-insuring against small risks, and investment behavior depending strongly on the past performance of stocks. Previous research has suggested that these kinds of behavior are more common among people with less education. However, the correlation may simply be the result of individual differences that lead people to choose less education. For example, people who value long run benefits in the way predicted by economic models may not just invest more in their retirement savings, but also invest more time and effort in their own education. The research team proposes to use an unusual natural experiment to resolve this puzzle. An overenrolled public college has had to conduct a lottery for enrollment places. Winners enroll at once, others must wait a year before enrolling. The team will use lab experiments and survey data from both groups to study whether the winners (who have more education because of early enrollment) are less likely to exhibit (i) time inconsistency, (ii) small stakes risk aversion, (iii) use of biased heuristics, or (iii) susceptibility to framing effects.