A Method for Evaluating the Quality of Financial Decision Making, with an Application to Financial Education

NBER Working Paper No. 20618

Issued in October 2014, Revised in November 2017

NBER Program(s):Public Economics



We introduce a method for measuring the quality of financial decisions built around a notion of financial competence, which gauges the alignment between consumers choices and those they would make if they properly understood their opportunities. We prove our measure admits a formal welfare interpretation even when consumers suffer from additional decision-making flaws, known and unknown, outside the scope of analysis. An application illuminates the pitfalls of the types of brief rhetoric-laden interventions commonly used for adult financial education: they affect behavior through unintended mechanisms, and hence may not improve decisions even when they perform well according to conventional metrics.

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Document Object Identifier (DOI): 10.3386/w20618

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