In times in which saving seems pointless and spending often impossible, the importance of intertemporal choices might not be evident. However, in economic decision-making it is crucial to behave time consistent in order to elaborate in right saving and investment behavior.
In an experimental research project, the Chair for Behavioral and Experimental Economics of the Ludwig-Maximilians University in Munich examine if and how education can change time preferences over time to identify significant effects on intertemporal decision-making. Assisting the research team in the field allows me to give an insight about the procedure. In order to forecast possible outcomes, the results of the evaluation from the previous year are also stated in the following report.
The objective of the study was to analyze if financial education initiatives can influence time preferences of adolescents. Following a random assignment of the initiative, intertemporal choices have been measured using a controlled and incentivized experiment. Results of the previous year show that there is a positive influence of financial education intervention on time consistency.
The experiment took place in 32 classes (7th or 8th grade) in schools of the lower track of the German high school system in Munich and surrounding. Participants in the treatment group completed a financial training, My Finance Coach, before the experiment took place. The training is offered by a non-profit organization since 2010. It coaches students in financial decision-making due to three standardized modules, including shopping, planning and saving. However, the training does not include any decisions that directly resemble the tradeoffs made in the experimental task.
One month after the training, the experiment took place. The experiment was constructed by a detailed instruction on the upcoming procedure, followed by four control questions that proofed if the task has been understood. Then the participants conducted the time-preferences elicitation task and a survey. The session was completed by a drawn, deciding which of the decisions will be paid to the pupils. They received their payment in cash, based on the individuals’ decision, in two points in time.
Intertemporal choice was measured with a controlled and incentivized task, the Convex Time Budget (Andreoni and Sprenger, 2012). This method asks individuals to allocate amounts of money to an earlier point in time or a later point in time. Choices are elicited by using three different combinations of payments (today and two weeks; today and four weeks; in two weeks and in four weeks). On each decision sheet seven different interest rates were presented. Going from top to bottom, the price for the earlier payment increases i.e. preferring an earlier payment would decrease the overall payment received. Students could chose between four combinations of money at the earlier and later points in time for each of the 21 (3×7) choices.
Example of the CTB Task, 2014
Comparing decisions with different payoff periods but same interests provides identification of the degree of present bias. Allocations in situations when the earlier payment is made immediately are compared to allocations when the earlier payment is delayed. Further, comparing decisions with a delay of 2 and 4 weeks allows identification of the degree of impatience.
After the experimental task, the pupils answered the survey. The questions survey the socio-economic status of the individuals’ family, the financial knowledge and the financial and savings behavior. In addition, questions capturing heterogeneity in cognitive skills were included.
One of the strongest concerns, which arose during the experiment, was if choices are in coherence with the law of demand i.e. if adolescents choose smaller earlier payments if the price of choosing earlier payments increases. In order to cope with inconsistency, the instructor explicitly recommended to the students only to chose payments on the right side to the previous decision. However, during the sessions the students behaved differently. Their behavior questions if the task has been conceived. In the evaluation of the data last year, choices has been evaluated using an econometric model which allow for stochastic choices, coping for possible bias of the preference parameters and thus for inconsistency.
The results of the study conducted in the previous year suggest that financial education has a significant impact on intertemporal choices. Students in the control group allocated 6.73% more of their budget to the earlier point when the earlier point is today compared to in two weeks, stating more present- biased choices. In addition, choices made by students who participated in the financial training are more time-consistent. The financial training also induces an increase in the share of choices that is consistent with the law of demand. However, there was no significant evidence for an increase in the average allocation to earlier payments, when the delay between the earlier and later payments is increased. This result suggests that the treatment had no significant effect on patience. Taking the individual’s characteristics into account, the study found that the effects of the financial coaching varies strongly among pupils with regard to the pupil’s socio-economic background, age and cognitive ability.
The results of the study from this year are expected around spring 2015.