The role of cognitive abilities on financial literacy: New experimental evidence

Financial literacy research focuses on why, how, and when people acquire financial knowledge, shape their financial attitudes, and adapt their financial behaviors. The literature demonstrates that some demographic characteristics highly correlate with financial literacy. However, demographic factors often mask the ultimate determinants of financial literacy acquisition such as risk aversion, time preferences, cognitive and behavioral biases, personality traits, cognitive and non-cognitive abilities, among others. Theory suggests that cognitive ability is one of the fundamental factors in explaining financial literacy. We offer experimental evidence supporting the key role of cognitive ability in financial literacy acquisition. Our experimental setting allows us to (a) overcome particular limitations of the traditional multiple-choice questions survey designs, (b) provide compatible incentives to make participants exert an appropriate level of effort to solve the assigned tasks, and (c) use a well-known measure of cognitive abilities. We find that individuals with higher cognitive abilities are more financially literate. Our main result holds even after controlling for some of the main confounding factors identified in the literature. In contrast to previous studies, we find no role for gender in explaining financial literacy once we control for cognitive abilities.