Noncognitive Abilities and Financial Distress

Noncognitive Abilities and Financial Distress

Gianpaolo Parise and Kim Peijnenburg

Journal paper

The Review of Financial Studies

2019

This paper provides evidence of how noncognitive abilities affect financial distress. In a representative panel of households, we find that people in the bottom quintile of noncognitive abilities are 10 times more likely to experience financial distress than those in the top quintile. We provide evidence that this relation largely arises from worse financial choices and lack of financial insight by low-ability individuals and reflects differential exposure to income shocks only to a lesser degree. We mitigate endogeneity concerns using an IV approach and an extensive set of controls. Implications for policy and finance research are discussed.