Essays on financial literacy, cognitive ability and financial decision-making.

This thesis consists of three empirical essays which analyse the impact of financial literacy and cognitive ability on financial decision-making. The first essay examines the relationship between financial literacy and stock market participation in the higher education context. Using a novel survey of Indonesian students, this essay provides evidence that advanced financial literacy is a key determinant of financial decision-making: students with higher advanced financial literacy are more likely to participate in the stock market. These findings have important policy implications for achieving higher levels of access to finance in Indonesia as the majority of youths only display basic financial knowledge, and few go beyond these basic concepts. The second essay analyses the influence of exponential growth bias on portfolio allocation of retirement savings. Exponential growth bias refers to individuals’ underestimation of the effects of exponential growth. Using a new survey of Indonesian employees from various sectors, the results show that exponential growth bias matters empirically for portfolio choice. Bias employees favour short-term over long-term assets in their portfolio and have propensity to acquire illiquid assets. This implies that bias can significantly affect employees’ retirement wealth due to non-optimal planning. The third essay assesses the relationship between cognitive ability as a key information-processing function and financial asset participation. Using the Indonesian Family Life Survey, which is representative of about 83% of the Indonesian population, the findings provide evidence that individuals with higher cognitive ability are more likely to hold financial assets than those with lower cognitive ability. Furthermore, the results show some evidence that the relation between cognitive ability and financial asset holding is mediated by two behavioural parameters: risk tolerance and patience traits. These results have important policy implications for drawing individuals into the formal financial market and improving individual welfare in Indonesia.