Household Finance 0.5 or 2.0?

How exactly do individuals approach financial decisions? Do they apply sophisticated formulas, back of the envelope math, do they guess or something else? The presented paper shows that literally asking individuals to explain their approaches generates new insights about those questions that are reliable and have predictive power out of sample. The authors find, for example, that when assessing the value of an annuity 40% of individuals use some math with some using formulas similar to actuaries; the other 60% apply guessing strategies. Valuation approaches predict valuation results, valuation precision, and behavioral reaction to a priming intervention designed to match the approach discovered. The method opens new pathways to understanding financial decision making as well as designing effective policy interventions.