July 2014
Article
Review of Financial Studies

Smart Money? The Effect of Education on Financial Outcomes

By: Shawn A. Cole, Anna Paulson and Gauri Kartini Shastry

Format:Print

Abstract

Household financial decisions are important for household welfare, economic growth and financial stability. Yet, our understanding of the determinants of financial decision-making is limited. Exploiting exogenous variation in state compulsory schooling laws in both standard and two-sample instrumental variable strategies, we show education increases financial market participation, measured by investment income and equities ownership, while dramatically reducing the probability that an individual declares bankruptcy, experiences a foreclosure, or is delinquent on a loan. Further results and a simple calibration suggest the result is driven by changes in savings or investment behavior, rather than simply increased labor earnings.

Keywords

Personal Finance; Investment; Decisions; Behavior; Financial Condition

Citation

Cole, Shawn A., Anna Paulson, and Gauri Kartini Shastry. "Smart Money? The Effect of Education on Financial Outcomes." Review of Financial Studies 27, no. 7 (July 2014): 2022–2051.