DOI: 10.6084/m9.figshare.30344587
title: <b>The moderating effect of financial literacy on risk preferences and time preferences</b>

description: <b>Purpose</b>This paper examines the moderating influence of financial literacy on time and risk preferences. Existing research indicates that individuals with higher levels of financial literacy are more likely to attain better life outcomes. Achieving these outcomes depends on making beneficial intertemporal and risk-related decisions, guided by one’s financial literacy. While previous studies have directly assessed the impact of financial literacy on life outcomes, this study contributes to the literature by exploring the moderating role of financial literacy in shaping time- and risk-preference choices.<b>Design/methodology/approach</b>Data were collected from 191 university students in South Africa using the Multiple Price List (MPL) time-preference and risk-preference questionnaire, a financial literacy test, and a time-preference questionnaire. Test scores measure financial literacy, while time preferences are elicited through individual discount rates, and risk preferences through risk parameters. Quantile regression is employed to analyse the moderating effect of financial literacy on time and risk preferences. To ensure robustness, the study also utilised propensity score matching (PSM) in a quasi-experimental analysis. The financial literacy dummy variable serves as the treatment in the PSM analysis.<b>Findings</b>Graphical illustrations show that respondents were generally present-biased in their time-preference choices, and that subjects with low financial literacy were typically more risk-loving. Quantile regression headline findings indicate that financial literacy influences both time- and risk-preference choices. Additionally, the study concluded that time preferences significantly moderate financial literacy. An increase in financial literacy is associated with a decrease in time preferences, indicating that as financial literacy rises, subjects become more patient. Furthermore, greater financial literacy is associated with greater risk aversion among subjects. A PSM quasi-experimental analysis also confirms that financial literacy influences time and risk preferences: respondents with high financial literacy are more patient (lower discount rates) and risk-averse (higher risk aversion).<b>Research limitations/implications</b>Eliciting risk and time preferences via MPL might not accurately reflect human attitudes. University students may not be a good representative sample of the national population. There is a need for improved instruments to assess time- and risk-preference choices within nationally representative populations.<b>Practical implications</b>Financial literacy encourages patience and risk aversion in economic decisions. Making investments with larger, delayed returns and being cautious about risks may help individuals with high financial literacy achieve better life outcomes, as shown in other studies.<b>Originality/value</b>To the best of our knowledge, this is one of the few studies conducted in non-Western, educated, industrialised, wealthy, and democratic (non-WEIRD) countries that examines the moderating role of financial literacy on time and risk preference choices in a laboratory setting.