Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel

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