The Effect of the Economic Situation on Time and Risk Preferences: Does Financial Literacy Matter?

Abstract

Economic situation is considered to have an effect on economic decision-making, with poor people having more myopic preferences. However, this relationship might not be that straightforward as economic decision-making should also be determined by financial literacy. A pre-registered cross-validation procedure was used to test a structural model outlining the causal mechanism of the relationships between poverty, its perception, financial literacy, and time-discounting and risk preferences in tasks with hypothetical rewards. Even after respecifying the model, mostly weak or inconclusive relationships were observed. These results replicated fairly well when a sensitivity analysis was run on data from a similar study which used also monetary rewards. While the observed effects were found to be bigger, they were still rather weak. The study discusses time and risk preferences as being stable traits, which might be less dependent on the long-term economic situation, its perception, and financial literacy than would be expected.

Keywords

• economic situation
• poverty
• time-discounting
• risk preference
• financial literacy