Why Do Financially Illiterate Students Perceive Lower Education Returns? Evidence From a Survey in Rural China

This paper studies how students’ financial literacy affects their perceptions of returns to schooling and consequently decisions. We first propose a model human capital accumulation where financially illiterate students exhibit cognitive bias “ironing heuristic.” With this decision heuristic, tend linearize the relationship between educational investments future earnings, resulting in underestimated education inadequate study efforts. Using survey data from four rural middle schools Southwest China, we then find positive correlation perceived education. In particular, estimate earnings function shows that its curvature significantly increases with knowledge compound interest, supporting assumption theory. Our findings suggest promoting may be an effective policy motivate learn at school, especially poor areas. JEL: I26, G53 (Financial Literacy), D91, J24