Relationship between an Inconsistent Degree of Financial Literacy and Inconsistent Decision-Making in Intertemporal Choices

Intertemporal choice refers to the decision-making process involving trade-offs between rewards available at different points in time (smaller sooner versus larger later rewards). In this process, empirical evidence often deviates from the exponential preferences predicted by the normative model. A hyperbolic discount function is closer to the behaviour of individuals and explains the mechanism of temporal inconsistency, i.e., the phenomenon whereby preferences vary over time by applying a greater discount in the present. Hyperbolic preferences have been associated with addictive attitudes towards smoking, alcohol, etc., depression or attention deficit hyperactivity disorder. Known measures in the literature make it possible to quantify how far hyperbolic preferences deviate from an exponential trend. In addition to behavioural and cognitive factors, financial literacy must be incorporated to study its role in individual decision-making behaviour. The present paper analyses the relationship between the degree of decision-making inconsistency and the degree of financial literacy inconsistency with respect to three dimensions, i.e., knowledge, behavior, and attitudes. It will show how financial literacy is important but not sufficient to ensure rational choices, but rather a good correlation between its dimensions. The results of this research may be included when creating the investor profile required by MiFID, considering therefore the results of behavioral finance studies in these profiles. Besides, understanding the psychological biases that can influence financial decision-making can help investors make more informed decisions and avoid common mistakes