Financial literacy only helps people make smarter economic predictions when they have a cash cushion; that cognitive advantage disappears the moment they face financial stress.
April 1, 2026
Original Paper
Belief Formation under Cognitive and Financial Constraints
SSRN · 6393478
The Takeaway
While we usually think of financial education as a permanent skill, this study shows it is incredibly fragile. Under liquidity stress, even the most financially literate households stop updating their economic expectations logically, effectively 'turning off' the benefits of their education during the moments they need it most.
From the abstract
We study how households form inflation expectations when cognitive capacity and financial constraints differ across agents. Using monthly microdata from the ECB Consumer Expectations Survey for 11 euroarea countries (April 2020-January 2026), merged with high-frequency monetary policy events from the EA-MPD database, we document persistent heterogeneity in belief formation that is not explained by information availability alone. We interpret financial literacy as a slow-moving stock of cognitive