Smart people know how the economy works: Cognitive ability, economic knowledge and financial literacy

Abstract

Cognitive ability correlates positively with many financial outcomes but why? One important relationship to understand is the degree to which cognitive ability is associated with greater knowledge of economics, but this has not been tested extensively. Here in two large, pre-registered studies (N = 1356), we tested the relationship between cognitive ability and both economic knowledge and financial literacy. Three predictions were key: i) Cognitive ability would show a large positive association with economic knowledge; ii) Cognitive ability would be associated with better financial literacy and iii) Greater economic knowledge would be positively associated with financial literacy. All three predictions were supported and replicated. Cognitive ability predicted economic knowledge (r = 0.37 to 0.52) independent of and with much larger effects than either educational attainment or economics courses. The findings extend effects of general ability to include greater awareness of economic functions, and improved use of economic information which improves lifetime financial wellbeing.

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