One life skill working in finance teaches people is how to act disappointed, even insulted, at being offered an absurd amount of money for…
The ABCs of Financial Education: Experimental Evidence on Attitudes, Behavior, and Cognitive Biases
This paper uses a large-scale field experiment in India to study attitudinal, behavioral, and cognitive constraints that can stymie the link between financial education and financial outcomes. The study complements financial education with (i) financial incentives on a financial literacy test to affect participant motivation, (ii) financial goal setting to provide a psychological nudge, and (iii) personalized financial counseling to enhance the intensity of treatment. The analysis finds no impact of financial incentives on learning but significant effects of both goal setting and counseling on real financial outcomes. These results identify important complements to financial education that can bridge the gap between financial knowledge and behavior change. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2819 . This paper was accepted by Amit Seru, finance.
Harry Browne’s 17 Golden Rules of Financial Safety
When you read in the news that a person whom you know as rich and wealthy is in financial trouble or has declared bankruptcy, it is easy to feel a sense of futility about managing your own money. Y…
The Beginning of the End of Big Tech
From politicians to VC firms, everyone is falling out of love with the massive, money-oriented, global technology titans. In their place, we have the chance to build something open and trustworthy.
5: Behavioural biases in personal finance
Behavioural economics merges psychology and economics to explore systematic deviations in financial decision-making from traditional economic models. This chapter examines key biases such as mental accounting, present bias, planning fallacy, and misunderstanding of risk, which influence spending, saving, investing, and insuring decisions. Demonstrating the interplay of cognitive biases and heuristics highlights why individuals make suboptimal choices despite financial literacy and resource capacity. Strategies like goal-setting, commitment devices, and education interventions are evaluated, focusing on their limitations and potential for addressing these biases. The chapter concludes by emphasising the need for systemic changes, such as policy-level interventions and financial regulation, to complement behavioural interventions and address structural barriers to better financial decisions. Future research directions are suggested, including tailoring interventions, exploring technology's role, and integrating systemic solutions to support sustainable financial well-being.
A Different Approach To VC - AVC
I wrote this to my partner the other day. I’m not going to provide the context. It doesn’t matter. It could have been about almost anything in the startup sector right now. “the biggest thing that is wrong with the startup sector right now is entrepreneurs and their teams are too focused on valuation and […]
Debt literacy, financial experiences, and overindebtedness
We analyze a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness. Debt literacy is a component of broader financial understanding that measures knowledge about debt and self-assessed financial knowledge. Financial experiences are the participants’ reported experiences with traditional borrowing, alternative borrowing, and investing. Overindebtedness is a self-reported measure. Debt literacy is low, with only about one-third of the population grasping the basics of interest compounding. Even after controlling for demographics, we find a relationship between debt literacy and both financial experiences and debt loads. Individuals with lower levels of debt literacy tend to transact in high-cost manners, incurring higher fees and using high-cost borrowing. We provide a rough estimate of the national implications of debt ignorance on credit card costs by consumers. Less knowledgeable individuals also report that their debt loads are excessive or that they are unable to judge their debt position.
The Financial Knowledge Scale: An Application of Item Response Theory to the Assessment of Financial Literacy
Despite increasing interest in and funding for financial literacy and financial education programs in the private and public sectors, the field of financial literacy still has a major obstacle to overcome: the lack of a widely disseminated measure of financial literacy, developed through rigorous psychometric analyses. In this article, we develop such a measure, focusing specifically on financial knowledge . Using item response theory (IRT), we analyze items from three national surveys, resulting in a psychometrically sound 20‐item financial knowledge scale. By using IRT, the current analysis uses individuals' answers to inform which questions to include in the scale in the first place, rather than simply confirming relationships between these answers and other financially relevant outcomes post hoc. Widespread use of this index and the continued use of modern psychometric techniques would allow for the comparison of financial knowledge, measured consistently and reliably, across studies, populations, and programs.
David Graeber: "Spotlight on the financial sector did make apparent just how bizarrely skewed our economy is in terms of who gets rewarded"
David Graeber explains why the more your job helps others, the less you get paid
Selection into Financial Education and Effects on Portfolio Choice
We study the impact of a financial education program on portfolio choices in a setting that allows us to examine both participation decisions and differences in program benefits across individuals. We directly elicit willingness to pay for financial education and show that individuals with higher financial literacy, greater confidence in applying new knowledge, and higher expected returns are willing to pay more. Using incentivized portfolio allocation tasks, we develop outcome measures tailored to individual risk preferences and show that financial education improves decision quality along these dimensions. The program increases the share of participants who experience an improvement by 20 percentage points, corresponding to average gains of 3.2 percentage points of initial wealth. Individuals with the highest willingness to participate benefit disproportionately from the program, with important implications for the design and evaluation of financial education initiatives. By isolating a specific investment skill in a setting with voluntary participation, our design sheds light on how selection into financial education shapes measured program effects and informs the assessment of broader workplace and public training programs. This paper was accepted by Marie Claire Villeval, behavioral economics and decision analysis. Funding: The authors thank the Pension Research Council of Wharton School at the University of Pennsylvania, as well as the Retirement and Savings Institute at HEC Montréal, for generous research funding. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2024.08268 .
Cut me some slack! How perceptions of financial slack influence pain of payment
Abstract Consumers often experience pain of payment, a tug of negative affect that holds back their spending. While the literature has long viewed pain of payment as self‐regulatory in nature, it has left the dynamics of self‐regulation that lead to the pain of paying largely unaddressed. In self‐regulation, affect arises when people move away from a goal they hold. Thus, understanding the specific goals that people consider when making a payment can help us better predict when pain of payment will arise. We propose that people have a goal to maintain financial slack, and that violating this goal contributes to pain of payment. Thus, people experience more pain of payment when the goal to maintain financial slack is stronger or when it is particularly salient that a purchase entails losing financial slack. Critically, subjective changes in financial slack are not equivalent to objective changes in wealth, altering pain of payment for economically equivalent trades. This research contributes to the existing literature by identifying a novel antecedent to the pain of payment. It additionally expands our understanding of people's preferences between payment systems. Finally, it offers guidance to practitioners who wish to minimize pain of payment among their consumers.
Le capitalisme de la finitude : pessimisme et bellicisme
Traduction française de « Capitalism of finitude: pessimism and bellicosity. Review of Arnaud Orain’s "Le Monde Confisqué" » de Branko Milanovic
Pain of Paying? — A Metaphor Gone Literal: Evidence from Neural and Behavioral Science
How do individuals consider the price of a good when making purchase decisions? Standard economic theories assume an analytical process: Individuals consider th
The Future of Money: How the Digital Revolution Is Tran…
A cutting-edge look at how accelerating financial chang…
The end of theory? AI and ignorance in financial markets
AI’s growing role in finance challenges traditional expectations of transparency and theoretical understanding. While machine learning (ML) models enhance financial decision-making, they remain largely agnostic to established financial theories, producing knowledge and ignorance in ways that differ from traditional models like VaR, DCF, and Black-Scholes. This essay explores the decoupling of AI models from theoretical financial knowledge and the resulting forms of ignorance. Using 22 semi-structured interviews, we investigate how ML models generate epistemic uncertainties. We focus on causal ignorance: AI systems, including those supported by XAI, fail to provide genuine causal explanations. Because understanding causation is inherently theoretical, AI-driven finance remains theory-agnostic and marked by theoretical ignorance. We explore how this ignorance differs from that of traditional models and what it implies for the role of theory in finance. Finally, we present three possible scenarios for the future of theory in finance and outline directions for further research.
Pluralistic: Bankruptcy is very, very good (17 Jun 2024) – Pluralistic: Daily links from Cory Doctorow
There's a truly comforting sociopathy snuggled inside capitalism ideology: if markets are systems for identifying and rewarding virtue, ability and value, then anyone who's failing in the system is actually unworthy, not unlucky; and that means the winners are not just lucky (and certainly not merely selfish), but actually the best and they owe nothing to their social inferiors apart from what their own charitable impulses dictate.