The mediation and moderation effect of risk preferences on time preference and financial literacy

Abstract

Abstract This paper investigates the mediation and moderation effect of risk preference on time preferences and financial literacy. Existing studies show that people with higher levels of financial literacy are more likely to achieve better life outcomes. Better life outcomes depend on an individual’s knowledge and intertemporal choices executed in a context where inherent risk is prevalent. Regardless, existing studies directly evaluate the effects of financial literacy on intertemporal decisions. The current study brings in a different dimension by accounting for risk preferences' mediation and moderation role on financial literacy and time preferences. We collected data from 191 university students in South Africa using Multiple Price List (MPL) time preference and risk preference elicitation, a questionnaire, and a financial literacy test. A maximum likelihood estimation (MLE) of a pooled panel structural equation model (SEM) analysis was employed. The headline finding is that risk preferences fully mediate the impact of financial literacy on time preferences. The random effect panel regression on the moderation effect of time-risk preferences on financial literacy and financial literacy-risk preferences on time preferences confirms reverse causality between time preferences and financial literacy. The moderation effect of risk preferences on time preferences and financial literacy varies from one category of subjects to another. Risk aversion is associated with high levels of financial literacy. JEL: C91; G4