Understanding Pensions: Cognitive Function, Numerical Ability and Retirement Saving*

“…empirical literature corroborates the significant and positive relationship between numerical abilities, which are particularly important for developing high financial skills, and desired financial behaviors (Almenberg & Widmark, 2011; Banks & Oldfield, 2007; Roa et al., 2019; Soll et al., 2013).”

“Research has also shown that numeracy is positively correlated with wealth (Banks and Oldfield, 2007; Smith et al., 2010; Banks et al., 2011; Lusardi, 2012; Estrada-Mejia et al., 2016).”

“Individuals with such attributes tend to have higher levels of financial literacy (Banks & Oldfield, 2007; Gerardi, Goette, & Meier, 2010).”

“…of stock market participation and investment portfolio composition (Banks and Oldfield 2007; Smith, McArdle, and Willis 2010), pension comprehension (Banks and Oldfield 2007), wealth accumulation (Smith, McArdle, and Willis 2010), enrollment in supplemental Medicare coverage (Chan and Elbel 2012),…”

“, 2008), retirement savings (Banks and Oldfield, 2007), career choices (Levy et al.”

“Banks and Oldfield (2007) showed that numeracy levels were strongly correlated with measures of retirement saving and investment portfolios, even when controlling for other dimensions of cognitive ability as well as educational attainment.”

“Second, individuals with high levels of financial knowledge are more likely to plan and save more than those with a low level of knowledge (Banks & Oldfield, 2007; Ekerdt & Hackney, 2002; Grable & Lytton, 1997; Hershey, Henkens, & Van Dalen, 2007).”

“Banks and Oldfield (2007) report a similar result for the United Kingdom.”

“…Italy, Germany, Sweden, Japan, New Zealand, Russia, and Europe as a whole (Alessie, Van Rooij, & Lusardi, 2011; Almenberg & Säve-Söderbergh, 2011; Banks & Oldfield, 2007; BucherKoenen & Lusardi, 2011; Christelis, Jappelli, & Padula, 2010; Crossan, Feslier, & Hurnard, 2011; Fornero & Monticone,…”

“Finally, there are 5 numeracy questions [17], with examples like “How many 25 paisa coins will you give me for one Rupee?” and “If 5 people all have the winning numbers in the lottery and the prize is 1000 Rupees, how much will each of them get?” The summary score is the total number of correct answers.”

“(Banks and Oldfield 2007).”

“19 Banks and Oldfield (2007) interpret these as numeracy measures, and many other studies use them as measures of financial literacy (Lusardi and Mitchell 2014).”

“In an English sample of individuals over 50 years, highly numerate people had more wealth compared to the less numerate, controlling for education and cognitive abilities such as literacy and executive function [16].”

“Negotiation scholars have shown that anxious negotiators are eager to escape anxiety-producing negotiations, and this motivates them to reach a quick agreement by lowering their aspirations and making more modest first offers (Brooks and Schweitzer 2011), in turn leading to worse negotiation outcomes (Liebert et al. 1…”

“2005), in the study of numeracy among adults 50 years of age and older in relation to understanding pensions (Banks and Oldfield, 2007), and among people of various age groups in financial literacy studies (Lusardi, 2008; Lusardi and Mitchell, 2009).”

“Most of these questions have previously been used in other studies such as the English Longitudinal Study of Ageing (Banks & Oldfield, 2007; Steptoe et al., 2013), the US Health and Retirement Survey (HRS) and the Rand American Life Panel (Lusardi & Mitchell, 2007).”

“…countries (Boyce and Danes, 1998; Staten et al. 2003; Ameriks et al., 2003; Bernheim and Garrett, 2003; Lusardi, 2004; Lusardi and Mitchell, 2007; Banks and Oldfield, 2007; Bell et al., 2008, 2009; Grinblatt and Keloharju, 2009; Stango and Zinman, 2009; Hung et al., 2009; Lusardi and Tufano,…”

“Studies that focused on math concepts have addressed rather advanced knowledge, demonstrating an age-associated decline (e.g., Banks & Oldfield, 2007; Duchhardt et al., 2017; Galesic et al., 2009; Wood et al., 2011).”

“In an ageing society elderly individuals are more and more often expected to make their own decisions, which may be impaired by poor cognitive abilities [2–4].”

“…between high and low basic financial skill levels and topics, such as old-age provision (Bucher-Koenen and Lusardi 2011; Lusardi and Mitchell 2007; Banks and Oldfield 2007; McArdle et al. 2011), economic growth (Almenberg and Gerdes 2012; Stango and Zinman 2009) and retirement wealth (Lusardi et…”

“The first measures it in level/absolute terms, by following the three Banks and Oldfield questions (Section 1-D) with the question: “How many of the last 3 questions (the ones on the disease, the lottery and the savings account) do you think you got correct?” We then subtract the respondent’s assessment from her actua…”

“Financial literacy level is defined through performance on the five items taken from the English Longitudinal Study of Aging (ELSA) and used by Banks and Oldfield (2007) and Gerardi et al.”

“We measure cognitive skills using 4 standard tests for general/fluid intelligence (McArdle, Fisher, and Kadlec 2007), numeracy (Banks and Oldfield 2007), financial literacy (crystalized intelligence for financial decision making) per Lusardi and Mitchell (2014), and executive function/working…”

“Banks and Oldfield (2007) found that those individuals with lower numerical ability have less in savings and they raise concern about this impact on older adults since a large portion of them were unable to perform simple interest calculations with”

“For more details, see Banks and Oldfield (2007). These questions were only asked in the first (2002–03) and fourth (2008–09) waves of ELSA.”

“Conversely, lower cognitive ability is associated with adverse financial behavior and outcomes, such as making more financial mistakes [6], having less financial knowledge [17], being less likely to participate in market recovery [25], and being more likely to default on mortgages [26].”

“More numerate individuals also do better financially by having more adequate retirement savings, avoiding predatory loans and paying credit cards in full (Banks & Oldfield, 2007; Lusardi & Mitchell, 2014; Sinayev & Peters, 2015).”

“Second, Banks and Oldfield (2007) find that respondents with higher numerical ability have greater retirement savings even when nonnumerical cognitive ability and education are controlled.”

“Adults with better numeracy skills save more for retirement and accumulate greater financial wealth than those with poorer numeracy skills (e.g., Banks et al., 2010; Banks & Oldfield, 2007).”

“Individuals with such abilities also tend to have higher levels of financial literacy (Banks & Oldfield, 2007 ; Gerardi et al., 2010 ).”

“Previous studies have shown that these factors may play an important role in learning effectiveness and in financial literacy acquisition (Banks and Oldfield, 2007; Okan et al., 2016; Hoffmann and McNair, 2019).”

“Banks and Oldfield (2007) find that financial literacy s strongly correlated to people’s understanding of pension rrangements.”

“Over-or under-confidence in performance: Overconfidence in perform: self-assessment > actual score Larrick et al (2007), Moore & Healy (2008) Underconfidence in perform: self-assessment < actual score Overconfidence in precision: 3 Larrick et al (2007), Moore & Healy (2008) Overconfidence in relative performance: 78 L…”

“In this context, Banks and Oldfield (2007) revelead strong positive relationship between numeracy and wealth in a sample of older adults.”

“Those who do take out a pension may find it difficult to decide on an appropriate contribution rate (Banks and Oldfield, 2007).”

“Responsibility for interpretation of the data, as well as for any errors, is the authors’ alone.”

“Studies by Lusardi and Mitchell (2006) and by Banks and Oldfield (2007), however, point to a link between numeracy and household wealth.”

“-- Table 1 around here -- 10 In line with other studies (e.g. Banks and Oldfield, 2007 and Gustman and Steinmeier, 2005), we find that younger individuals (as in closer to 50 which is the cut-off age in TILDA), women and poorly educated individuals are less likely to know about future benefits.”

“Other studies find a positive relationship between financial numeracy and knowledge and understanding of pension arrangements (Banks and Oldfield, 2007).”

“…thinking tend to rely more on heuristics and simplifying strategies that can lead to biased decision making (e.g., Ayal, Zakay & Hochman, 2012; Banks & Oldfield, 2007; Pacini & Epstein, 1999), while people with a higher tendency for rational thinking are more likely to seek diagnostic…”

“5 For instance, Banks and Oldfield (2007) reported that the elderly suffer from greater cognitive, gender, and education gaps than other groups.”

“…reported positive correlation between numerical skills and financial well-being of the individuals (Banks et al., 2010) where numerical skills and general cognitive abilities proved to be good predictors of various forms of financial successfulness (Banks and Oldfield, 2007; Gerardi et al., 2010).”

“…average individual (contrarywise, ill-informed individuals appear to respond systematically to their own misperceptions of pension incentives), and Banks and Oldfield (2007) emphasize the association between financial literacy and numeracy and the likelihood of efficiently developing a savings…”

“…illustrated by problems among adult populations executing basic calculations and lack of knowledge about and understanding of what is commonly considered essential financial literacy (Banks & Oldfield, 2007; Lusardi, 2015; Lusardi & Mitchell, 2011; OECD, 2005; Van Rooij, Lusardi, & Alessie, 2011).”

“Chen & Volpe (1998), Banks & Oldfield (2007), Lusardi (2008), Lusardi & Tufano (2009) and Scheresberg (2013) are unanimous in the opinion that female is less confident about financial knowledge than male.”

“Banks and Oldfield (2007) also show that the association between numeracy and wealth is stronger when numeracy reflects the maximum of the values for the two individuals in a benefit unit.”