Noncognitive Abilities and Financial Delinquency: The Role of Self-Efficacy in Avoiding Financial Distress

Abstract

We investigate a novel determinant of financial distress, namely, individuals' self-efficacy, or belief that their actions can influence the future. Individuals with high self-efficacy are more likely to take precautions that mitigate adverse financial shocks. They are subsequently less likely to default on their debt and bill payments, especially after experiencing negative shocks such as job loss or illness. Thus, noncognitive abilities are an important determinant of financial fragility and subjective expectations are an important factor in household financial decisions.