Summary: Cognitive ability in childhood correlates differently with various aspects of financial wellbeing in adulthood. Researchers analyzed data from 5,858 individuals, considering their cognitive skills at age 10 and their financial status later in life.
High cognitive ability linked positively with wealth indicators like savings and investment account ownership. Interestingly, the relationship between cognitive ability and debt formed an inverted U-shape, with those of average cognitive ability having the most debt.
Key Facts:
- The link between childhood cognitive ability and adult financial wellbeing differs across various financial measures, such as savings and debt levels.
- Higher cognitive ability in childhood was associated with better scores on measures of wealth, like savings and investment account ownership.
- The relationship between cognitive ability and debt was unique, forming an inverted U-shape, indicating people with average cognitive abilities held the most debt.
Source: PLOS
The relationship between cognitive ability in childhood and financial wellbeing in adulthood varies for different financial measures—such as savings levels versus having debt—per a new analysis of nearly 6,000 people. Joe Gladstone of the University of Colorado, Boulder, US and Jenna Adriana Maeve Barrett of Maastricht University in The Netherlands present these findings in the open-access journal PLOS ONE on June 7, 2023.
Prior research had already established a link between cognitive ability and financial wellbeing, with the general assumption in the field being that the mathematical nature of this relationship was a simple linear one. However, Gladstone and Barrett note, if this assumption were incorrect, researchers might be underestimating the role of cognitive ability in people’s financial wellbeing.
To test that assumption, Gladstone and Barrett analyzed data on 5,858 people who have participated in the British Cohort Study since 1970. They examined the relationship between participants’ cognitive abilities as evaluated at age 10 and several measures of their financial wellbeing in adulthood, such as debt-to-income ratio, level of savings, and investment account ownership.
They statistically accounted for the effects of childhood socioeconomic status and present-day income on finances.
The analysis showed that the mathematical nature of the relationship between childhood cognitive ability and adult financial wellbeing varied between different financial measures.
Higher cognitive ability was associated with better scores on measures of wealth, such as level of savings and investment account ownership. Plotted on a graph, these relationships were linear for most people, but non-linear for those with exceptionally high or low cognitive ability.
The researchers also found a linear relationship between cognitive ability and feeling stress about finances.
However, when plotted on a graph, the relationship between cognitive ability and debt was an inverted U-shape, such that people with either low or high cognitive abilities had the lowest debt, and those with average cognitive ability had the most debt.
More research will be needed to determine the mechanisms underlying the mathematical relationships uncovered in this study. Such knowledge could inform efforts to enhance people’s financial wellbeing.
The authors add: “Our study demonstrates the complex and diverse relationships between cognitive ability in childhood and financial wellbeing in adulthood. The association is not linear or simple and understanding this can help us develop more effective interventions to enhance financial wellbeing for people with varying cognitive abilities. In personal finance, one size does not fit all.”
About this neurodevelopment and cognition research news
Author: Hanna Abdallah
Source: PLOS
Contact: Hanna Abdallah – PLOS
Image: The image is credited to Neuroscience News
Original Research: Open access.
“Understanding the functional form of the relationship between childhood cognitive ability and adult financial well-being” by Gladstone J et al. PLOS ONE
Abstract
Understanding the functional form of the relationship between childhood cognitive ability and adult financial well-being
The increasing complexity of the modern financial landscape presents significant challenges for individuals’ financial well-being. In this study, we aim to investigate the relationship between cognitive ability and financial well-being by utilizing data from the British Cohort Study, which follows a sample of 13,000 individuals from birth in 1970 to the present day.
Our objective is to examine the functional form of this relationship while controlling for factors such as childhood socio-economic status and adult income. Previous research has established a correlation between cognitive ability and financial well-being, but has implicitly assumed a linear relationship.
Our analyses indicate that the majority of the relationships between cognitive ability and financial variables are monotonic. However, we also observe non-monotonic relationships, particularly for credit usage, suggesting a curvilinear relationship where both lower and higher levels of cognitive ability are associated with lower levels of debt.
These findings have important implications for understanding the role of cognitive ability in financial well-being and for financial education and policy, as the complexity of the modern financial landscape poses significant challenges for individuals’ financial well-being.
As financial complexity is increasing and cognitive ability is a key predictor of knowledge acquisition, misspecifying the true relationship between cognitive ability and financial outcomes leads to an undervaluation of the role of cognitive ability for financial well-being.
