Daniel Kahneman received the Nobel Prize in economics sciences in 2002, December 8, Stockholm, Sweden. This article is the edited version of his Nobel Prize lecture. The author comes back to the problems he has studied with the late Amos Tversky and to debates conducting for several decades already. The statement is based on worked out together with Shane Federik the quirkiness of human judgment. Language: ru

Maps of Bounded Rationality: Psychology for Behavioral Economics

This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision-making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.

/pdf/the-economic-importance-of-financial-literacy-theory-and-17mb1g4cfb.pdf

The Economic Importance of Financial Literacy: Theory and Evidence

To identify the effect of social capital on financial development, we exploit social capital differences within Italy. In high-social-capital areas, households are more likely to use checks, invest less in cash and more in stock, have higher access to institutional credit, and make less use of informal credit. The effect of social capital is stronger where legal enforcement is weaker and among less educated people. These results are not driven by omitted environmental variables, since we show that the behavior of movers is still affected by the level of social capital of the province where they were born.

/pdf/the-role-of-social-capital-in-financial-development-11s2xlzurg.pdf

The Role of Social Capital in Financial Development

Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks.

/pdf/financial-literacy-and-stock-market-participation-2k09u14z1v.pdf

Financial Literacy and Stock Market Participation

This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research, which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare, as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy. (JEL A20, D14, G11, I20, J26)

/pdf/the-economic-importance-of-financial-literacy-theory-and-2yhcozat6n.pdf

The economic importance of financial literacy: theory and evidence

As baby boomers approach retirement, individuals and policymakers are increasingly concerned about retirement income security. Thanks to dramatic advances in life expectancy over the last century, today's typical 65-year old man and woman can expect, on average, to live to ages 81 and 85 respectively. Perhaps even more impressive, over 17 percent of 65-year old men and over 31 percent of 65-year old women are expected to live to age 90 or beyond. Most people would agree with President Clinton that increasing life expectancy is "something wonderful." However, uncertainty about length of life carries the risk that individuals may outlive their resources and be forced to substantially reduce their living standards at advanced ages. This issue in brief summarizes a growing body of research on the important role of annuities in the U.S. retirement system.

How Should We Insure Longevity Risk In Pensions And Social Security

Front matter to "Tax Policy and the Economy, Volume 26"

Introduction to "Social Security Policy in a Changing Environment"

This volume analyzes the changing economic and demographic environment in which social insurance programs benefiting elderly households will operate. It also explores how these ongoing trends will affect future beneficiaries, under both the current Social Security program and potential reform options. An esteemed group of economists probes the challenge posed to Social Security by an aging population. The researchers examine trends in private sector retirement saving and health care costs, as well as the uncertain nature of future demographic, economic, and social trends - including marriage and divorce rates and female participation in the labor force. Recognizing the ambiguity of the environment in which the Social Security system must operate and evolve, this landmark book explores factors that policy makers must consider in designing policies that are resilient enough to survive in an economically and demographically uncertain society.

Social Security Policy in a Changing Environment

Illinois’ public pensions are among the worst funded in the nation. We present evidence that the main reason for Illinois' underfunding is a history of making inadequate contributions, dating back to the origins of the state's pensions. We discuss the recent history and legal status of pension reform efforts in the state. Using a fiscal model of the state's finances, we project how Illinois' fiscal situation may evolve in the future. A key finding is that with or without pension reform, Illinois will continue to face significant structural deficits that will require revenue increases and/or additional spending cuts to address.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w21293.pdf?abstractid=2621347&mirid=1

Jeffrey R. Brown

Papers

How Should We Insure Longevity Risk In Pensions And Social Security

Front matter to "Tax Policy and the Economy, Volume 26"

Introduction to "Social Security Policy in a Changing Environment"

Social Security Policy in a Changing Environment

Illinois Pensions in a Fiscal Context: A (Basket) Case Study