Gianpaolo Parise is an Associate Professor of Finance at Tilburg University and affiliated with CEPR.  Kim Peijnenburg is Professor of Finance at Tilburg University and affiliated with Netspar and CEPR.  

In a new study we recently presented at the Pension Research Council, we explored how people’s noncognitive abilities, including traits such as conscientiousness, emotional stability, grit, and locus of control, help shape their retirement savings, investment behavior, and financial planning.

What Are Noncognitive Skills?

Unlike IQ or numeracy, noncognitive abilities (sometimes called “soft skills”) refer to character traits that influence how people approach their goals and challenges. These include:

• Conscientiousness: Being organized, responsible, and self-disciplined;
• Grit: Being perseverant and passionate about achieving long-term goals;
• Locus of Control: Believing in one’s own ability to influence outcomes; and
• Emotional Stability: Having the ability to stay calm under pressure.

Not only do these traits develop early in life, but they are also stable in adulthood. Moreover, our work shows that they can be as influential as cognitive abilities in shaping people’s financial outcomes.

Saving More, Borrowing Less

A first finding is that people who are more conscientious tend to save more and build up more financial wealth over their lifetimes, while the less conscientious carry more debt. For example, we find that people scoring high on the conscientiousness scale average nearly €70,000 in financial assets, versus to just €43,000 among those who score low on this trait.

Such wealth differences persist even after controlling for differences in income, education, risk preferences, and financial literacy, implying that such personality traits influence financial behaviors independently of other factors. This confirms prior studies showing that people scoring high on internal locus of control and self-efficacy measures tend to accumulate more savings.

Investing More Wisely

Second, we show that people’s noncognitive skills also shape their investment decisions. For instance, those scoring higher on the conscientiousness scale are more likely to participate in the stock market and allocate more of their wealth to stocks. This matters, since failing to invest in equities can significantly reduce people’s long-term investment returns and, by extension, their financial wellbeing in retirement.

This finding complements other research (Jiang et al. (2024); Lindqvist et al. (2018)), demonstrating that personality traits influence peoples’ stock market participation and portfolio diversification.

Better Retirement Planning

Planning for retirement is a complex task that requires people to understand their retirement plan statements, track and forecast retirement income needs, and project long-term spending plans. Our research confirms that conscientious people are more likely to actively plan for retirement and do a better job investing their retirement funds.

For example, we found that 44% of people scoring above-average on the conscientiousness scale expressed a desire for more control over their retirement savings, versus only 36% of those scoring below average. Also, the more conscientious were not just more proactive; they were also more capable of handling financial autonomy responsibly.

Why This Matters for Policy

Understanding the role of noncognitive skills suggests lessons for those seeking to design better retirement outcomes and hence strengthen retirement security.

Some examples include the following:

• Behavioral nudges: Plan sponsors and policymakers could consider these insights about character traits when they design new ways to encourage saving and investing;
• Default pension plans: While investment defaults like Target Date Funds can help guide those who lack financial expertise, they may not align with what more conscientious employees would prefer, particularly when they seek greater control over their investment menus;
• Targeted financial advice: Financial advisors could better tailor their advice to clients’ individual personality profiles, so as to make them more effective.

Concluding Thoughts

Our research highlights some crucial but often overlooked factors driving people’s financial decision making, namely, their personality traits. While income and financial literacy are still influential, personal traits like grit and conscientiousness prove to be key for understanding why some people save diligently while others struggle, even when they earn similar wages. In a world where workers must shoulder rising responsibility for their own retirement saving, investing, and spending patterns, it’s essential to incorporate these psychological insights into policy and practice.

Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.