A03
Behavioral Biases, Financial Literacy and Borrowing Decisions
Discussion Papers

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Discussion Paper No. 264
December 22, 2020

The Effect of Self-Control on Borrowing: Experimental Evidence

Author:

Grohmann, Antonia (Aarhus University & DIW Berlin)
Hamdan, Jana S. (HU & DIW Berlin)

Abstract:

This paper examines the effect of reduced self-control on debt-taking in a laboratory experiment. We manipulate self-control using an ego depletion task and show that it is effective. Following the ego depletion task, participants can anonymously buy hot drinks on credit. We find no significant average effects, but find that treated individuals that have low financial literacy are more likely to buy drinks. We complement our experimental analysis with survey evidence that suggests that people with low self-control have more problems with the repayment of consumption debt, but this relationship is, in line with the experimental results, weaker for individuals with high financial literacy.

Keywords:

debt; consumption; borrowing; self-control; ego depletion

JEL-Classification:

D14; G51; C91

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Discussion Paper No. 240
April 29, 2020

Financial Education Affects Financial Knowledge and Downstream Behaviors

Author:

Kaiser, Tim (University of Koblenz-Landau & DIW Berlin)
Lusardi, Annamaria (George Washington University)
Menkhoff, Lukas (HU & DIW Berlin)
Urban, Carly (Montana State University)

Abstract:

We study the rapidly growing literature on the causal effects of financial education programs in a meta-analysis of 76 randomized experiments with a total sample size of over 160,000 individuals. The evidence shows that financial education programs have, on average, positive causal treatment effects on financial knowledge and downstream financial behaviors. Treatment effects are economically meaningful in size, similar to those realized by educational interventions in other domains and are at least three times as large as the average effect documented in earlier work. These results are robust to the method used, restricting the sample to papers published in top economics journals, including only studies with adequate power, and accounting for publication selection bias in the literature. We conclude with a discussion of the cost-effectiveness of financial education interventions.

Keywords:

financial education; financial literacy; financial behavior; RCT; meta-analysis

JEL-Classification:

D14; G53; I21

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Discussion Paper No. 227
December 19, 2019

The Effect of Social Comparison on Debt Taking: Experimental Evidence

Author:

Grohmann, Antonia (DIW Berlin)
Koch, Melanie (HU Berlin)

Abstract:

A number of studies show that there is a link between social comparison and high levels of household debt. However, the exact mechanisms behind this link are not yet well understood. In this paper, we perform a lab experiment designed to study the eff ects of social image concerns and peer information on consumption choices that can be financed through debt taking. We find that having to announce one's consumption decision publicly leads to leaving money on the table, which is the opposite of what we expected. Being informed about other participants' choices leads to conformity in choices between participants.

Keywords:

household finance; lab experiment; social comparison; peer effects

JEL-Classification:

D14; D12; D91

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Discussion Paper No. 205
December 4, 2019

The Dynamic Impact of FX Interventions on Financial Markets

Author:

Menkhoff, Lukas (HU Berlin and DIW Berlin)
Rieth, Malte (DIW Berlin)
Stöhr, Tobias (Kiel Institute for the World Economy)

Abstract:

Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Applying this approach to the most important, freely floating currencies, we find that FX intervention shocks significantly affect exchange rates and that this impact persists for months. We show for Japan and the US that interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.

Keywords:

foreign exchange intervention; structural VAR; exchange rates; interest rates; stock prices

JEL-Classification:

F31; F33; E58

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Discussion Paper No. 200
November 20, 2019

Don’t Expect Too Much – High Income Expectations and Over-Indebtedness

Author:

Klühs, Theres (Leibniz University of Hannover) 
Koch, Melanie (DIW Berlin)
Stein, Wiebke (Leibniz University of Hannover) 

Abstract:

Household indebtedness is rising worldwide. This study investigates one possible driver of this increase that is rooted in the theory of permanent income: high income expectations. We collect data from an emerging country, Thailand, as (over-) indebtedness in markets with incomplete financial infrastructure and social security can be devastating. Furthermore, our sample of rural households is exposed to a high degree of uncertainty, which makes expectation formation prone to behavioral biases. We implement a new measure for high income expectations and show that it is strongly and robustly related to both objective and subjectively felt over-indebtedness. Controlling for various household characteristics, unexpected shocks, and other possible confounding factors reduces the concern about reverse causality. In an additional lab-in-the-field experiment, we explicitly find that overconfidence, a specific form of biased expectation, is related to overborrowing. 

Keywords:

household debt; lab-in-the-field experiment; emerging markets

JEL-Classification:

D14; D84; D91

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Discussion Paper No. 187
September 30, 2019

Financial Education in Schools: A Meta-Analysis of Experimental Studies

Author:

Kaiser, Tim (University of Koblenz-Landau & DIW Berlin)
Menkhoff, Lukas (DIW Berlin)

Abstract:

We study the literature on school financial education programs for children and youth via a quantitative meta-analysis of 37 (quasi-) experiments. We find that financial education treatments have, on average, sizeable impacts on financial knowledge (+0.33 SD), similar to educational interventions in other domains. Additionally, we document smaller effects on financial behaviors among students (+0.07 SD). When restricting the sample to 18 randomized experiments average effect sizes are estimated to be about 0.15 SD units on financial knowledge and 0.07 SD units on financial behaviors. These results are robust irrespective of the meta-analytic method used and when accounting for publication bias. Subgroup analyses show the beneficial effect of more intensive treatments, albeit with decreasing marginal returns.

Keywords:

financial education; financial literacy; financial behavior; meta-analysis

JEL-Classification:

I21; A21; D14

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Discussion Paper No. 186
September 19, 2019

Financial Literacy and Intra-Household Decision Making: Evidence from Rwanda

Author:

Grohmann, Antonia (DIW Berlin)
Schoofs, Annekathrin (University of Passau & RWI)

Abstract:

Research has consistently shown that women’s involvement in household decision making positively affects household outcomes such as nutrition and education of children. Is financial literacy a determinant for women to participate in intra-household decision making? Using data on savings groups in Rwanda, we examine this relationship and show that women with higher financial literacy are more involved in financial and expenditure decisions. Instrumental Variable estimations confirm a causal link. For this reason, we perform a decomposition analysis breaking down the gender gap in financial literacy into differences based on observed sociodemographic and psychological characteristics and differences in returns on these characteristics. Our results show high explanatory power by education, happiness, symptoms of depression, and openness, but also suggest that a substantial fraction can be explained by differences in returns. We argue that this results from a strong role of society and culture.

Keywords:

financial literacy; women empowerment; intra-household decision making

JEL-Classification:

D14; J16; G02

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Discussion Paper No. 185
September 18, 2019

Coupled Lotteries – A New Method to Analyze Inequality Aversion

Author:

Koch, Melanie (DIW Berlin)
Menkhoff, Lukas (HU and DIW Berlin)
Schmidt, Ulrich (University of Kiel and ifW Kiel)

Abstract:

We develop and implement a new measure for inequality aversion: two peers are endowed with identical binary lotteries and the only choice they make is whether they want to play out the lotteries independently or with perfect positive correlation (coupling). Coupling has no other e ect than preventing outcome inequality. We implement the method in a survey in rural Thailand as well as a supplemental sample in a lab in Germany. As theoretically expected, coupling is related to being more risk averse, to having social status concerns, and to relying more often on formal and informal insurance. However, coupling is not related to giving in the dictator game.

Keywords:

inequality aversion; correlated risk; social status concerns

JEL-Classification:

D63; D91; D81

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Discussion Paper No. 152
April 15, 2019

Earn More Tomorrow: Overconfident Income Expectations and Consumer Indebtedness

Authors:
Grohmann, Antonia (DIW Berlin)
Menkhoff, Lukas (DIW and HU Berlin)
Merkle, Christoph (Kühne Logistics University)
Schmacker, Renke (DIW Berlin)
Abstract:

This paper examines whether biased income expectations due to overconfidence lead to higher levels of debt-taking. In a lab experiment, participants can purchase goods by borrowing against their future income. We exogenously manipulate income expectations by letting income depend on relative performance in hard and easy quiz tasks. We successfully generate biased income expectations and show that participants with higher income expectations initially borrow more. Overconfident participants scale back their consumption after feedback. However, at the end of the experiment they remain with higher debt levels, which represent real financial losses. To assess the external validity, we nd further evidence for the link between overcondence and borrowing behavior in a representative survey (GSOEP-IS).

Keywords:
consumption; borrowing; overcondence; income expectations
JEL-Classification:
D14; D84; G40
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Discussion Paper No. 131
December 20, 2018

Active Learning Improves Financial Education:
Experimental Evidence

Authors:

Kaiser, Tim (University of Koblenz-Landau and DIW Berlin)
Menkhoff, Lukas (DIW Berlin)

Abstract:

We conduct a randomized field experiment to study the effects of two financial education interventions offered to small-scale retailers in Uganda. The treatments contrast "active learning" with "traditional lecturing" within standardized lesson-plans. We find that active learning has a positive and economically meaningful impact on savings and investment outcomes, in contrast to insignificant impacts of lecturing. These results are not conditional on prior education or financial literacy. Tentative evidence suggests that only active learning stimulates several cognitive and non-cognitive mechanisms; moreover, a social mechanism may be at play as treated individuals join social groups discussing financial matters.

Keywords:

financial behavior; financial literacy; active learning; lecturing; training method; field experiment

JEL-Classification:

I21; A20; D14; O16

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