A Method for Evaluating the Quality of Financial Decision Making, with an Application to Financial Education

Sandro Ambuehl, B. Douglas Bernheim, Annamaria Lusardi

NBER Working Paper No. 20618
Issued in October 2014, Revised in November 2017
NBER Program(s):Public Economics

We introduce a method for measuring the quality of financial decisions built around a notion of financial competence, which gauges the alignment between consumers choices and those they would make if they properly understood their opportunities. We prove our measure admits a formal welfare interpretation even when consumers suffer from additional decision-making flaws, known and unknown, outside the scope of analysis. An application illuminates the pitfalls of the types of brief rhetoric-laden interventions commonly used for adult financial education: they affect behavior through unintended mechanisms, and hence may not improve decisions even when they perform well according to conventional metrics.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w20618

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