Sandra J. Huston

The Brighter Side of Financial Risk: Financial Risk Tolerance and Wealth

Investors who accept a greater degree of financial risk expect to benefit from higher returns and greater wealth over time. This study explores the relationship between net worth and net financial assets and risk tolerance using data from the 1998 Survey of Consumer Finances. Willingness to take financial risk is associated with a significantly higher net worth for the whole sample, and for samples within age groups. Risk tolerance among those over 65 is among the strongest predictors of a higher net worth.

Old Age and the Decline in Financial Literacy

Households age 60 and older bear increasing responsibility for managing retirement portfolios, and they hold the majority of financial assets in the United States. Cognitive aging studies find evidence of a decline in fluid and crystallized intelligence in old age that may impact the ability to manage money effectively. Using a large sample of older respondents, we test whether knowledge of basic concepts essential to effective financial choice declines after age 60. We find a consistent linear decline in financial literacy score after age 60. A nearly identical rate of decline among men, stockowners, older, and college-educated respondents indicates that cohort effects are not driving the results. Confidence in financial decision-making abilities does not decline with age. A separate analysis using data that include measures of cognitive ability suggests that a natural decline in both fluid and crystallized intelligence in old age contributes to falling financial literacy scores. This paper was accepted by Brad Barber, finance.

Factors Affecting the Probability of Choosing a Risky Diet

Eating a poor diet is risky behavior. Inadequate nutrition compromises health and can increase the probability of premature death and/or reduced life quality. This paper uses a cost-benefit analysis from a health economic perspective to assess impact of costs and benefits associated with the odds of choosing a risky diet. Results indicate that time preference as measured through education, smoking, exercise, nutrition panel use, and motivation for nutrition knowledge significantly affect the odds of choosing a risky diet. In addition, variables hypothesized to influence the associated costs of tradeoff between present and future utility—location (both region and urbanization), income, race, gender, and age—are found to have an impact on the likelihood of choosing a risky diet.

The mitigating influence of time preference on the relation between smoking and BMI scores

Prior studies find a strong negative relation between smoking and body mass index (BMI). Smoking and obesity both imply a preference for utility in the present at the expense of future consumption. This study proxies time preference through a composite index of equally-weighted intertemporal behaviors to isolate the impact of smoking on BMI independent of time discounting. Adding time preference to a multivariate model inflates the magnitude of the smoking effect, consistent with discounted utility theory. Results suggest that the full effect of non-intertemporal aspects of smoking (for example substitution of cigarettes for food) on BMI scores may have been underestimated in previous studies that fail to account for the mitigating influence of time preference.

Time Preference and the Importance of Saving for Retirement

This study models the importance respondents place on saving for retirement as a function of time preference using a sample of 6812 undergraduate and graduate students. Individual time preference is measured by comparing dollar values over time and through a combination of intertemporal behaviors that may be the most theoretically appropriate measurement of the discount rate for utility over time. Results show strong correlations among decision making domains that involve time discounting. Time preference measured by comparing dollar amounts across time proves a much weaker predictor than a combination of intertemporal behaviors measured either as a linear scale or as factors. In multivariate models, a factor of intertemporal preventive health behaviors is a stronger predictor of the importance of saving for retirement than all other explanatory variables including age, race, parental income, gender, GPA, and college major.

A Financial Sophistication Proxy for the Survey of Consumer Finances

The Survey of Consumer Finances (SCF) contains detailed US household balance sheet information and is frequently used to study outcomes in household finance. There is no variable that explicitly measures financial sophistication in the SCF. We propose a factor score composed of four questions that can serve as a proxy of financial sophistication to correct a possible important omitted variable bias. The results using the sophistication factor show how controlling for financial sophistication provides a more precise estimate of the marginal effects of control variables such as education and race.

Financial Sophistication and Housing Leverage Among Older Households

Increasing mortgage debt among older households has been cited as evidence of financial distress caused by low financial knowledge, poor lending practices, and an increased appetite for debt. This paper investigates whether housing leverage among older households is related to financial sophistication, tax effects, and a desire to increase portfolio allocation to risky assets. Results indicate a time trend in low housing leverage, but no trend in high housing leverage. While housing leverage increases with liquidity constraints, it also increases with financial sophistication, and tax and portfolio incentives are strongly related to high housing leverage. The incentive to borrow against home value created by the deductibility of mortgage interest appears to encourage greater housing leverage and vulnerability to housing price shocks.

Assessing Financial Literacy

How do you know if students are benefiting from financial education? The answer requires an assessment of financial literacy. Ideally, a financial literacy assessment would take place before and after the administration of a financial education program to gauge improvement in human capital specific to personal finance. While there are certainly a multitude of educational approaches available for enhancing financial literacy, the human capital improvement we are trying to measure is less variable in nature. This chapter focuses on the usefulness of assessing financial literacy along with the various elements to be considered in the measure, including the context, concept, content, instrument creation, and implementation.

Cognitive Ability and Post-Retirement Asset Decumulation

There is evidence that retirees are decumulating their assets very slowly or not at all. This behavior does not follow the normative framework of the life-cycle hypothesis (LCH). Decumulating in a manner that maximizes expected utility is a complex process that requires the estimation and input of multiple factors when analyzing consumption alternatives. As a result, the decumulation decisions of retirees may be impacted by their cognitive ability. Evidence suggests that cognitive ability is relevant to financial decisions and that the presence or absence of cognitive ability is important when considering choices in combination across multiple time periods. We find that both life-cycle factors and cognitive ability are significant predictors of the rate of asset decumulation, and that those with higher levels or cognitive ability are decumulating at a significantly higher rate. We also show that the level of cognitive ability influences the effects of expected longevity, market returns, and medical costs. While the estimates for these factors are consistent between those with high and low cognitive ability, there are significant differences in how the estimates are incorporated into the asset decumulation decisions of the two groups.

Using a Financial Health Model to Provide Context for Financial Literacy Education Research: A Commentary.

1Department of Personal Financial Planning, Texas Tech University,1301 Akron Street—MS 1210, Lubbock, TX 79409-1210, 806-834-8395, sandra.huston@ttu.edu In the article, “Enhancing links between research and practice to improve consumer financial education and wellbeing” Billy J. Hensley, Director of Education at National Endowment for Financial Education® (NEFE®), outlines his perspective on the current relation between financial education and financial outcome (downstream financial behavior) by drawing on a recent study by Fernandes, Lynch & Netemeyer (2014). Evidence from this meta-analysis study indicates that financial education has little to no impact on financial outcome and the three main conclusions Hensley highlights from the Fernandes et al. (2014) study relate to education timing and decay, weak linkage between education and behavior, and the need for improvement both in terms of education programs and research design.