An item response theory approach to constructing and evaluating brief and in-depth financial literacy scales

We applied item response theory (IRT) to construct and evaluate new brief and in-depth financial literacy scales. A survey of a UK adult sample (N = 589) included 50 questions to assess knowledge about managing financial resources and competence in using personal finance-related information—including five widely used items, on interest rates, inflation, investment diversification, mortgages and bonds. IRT applied to a scale of these items identified some limitations, overcome via further iterations to construct a new brief scale with sound psychometric properties. IRT was then applied iteratively to our pool, resulting in an in-depth, 20-item scale, also psychometrically sound, covering four broad financial domains: everyday money transactions; the concept of money; borrowing; and saving and investment. Parallel 10-item sub-scales were also evaluated. The validity of the new scales was demonstrated by regression analyses which found that, controlling for demographic variables, financial literacy predicted key indicators of financial well-being.     

Financial Literacy as More than Knowledge: The Development of a Formative Scale through the Lens of Bloom's Domains of Knowledge

For well over a decade, financial literacy has been a primary lens through which researchers approach financial education. Unfortunately, in most cases, this potentially rich construct is reduced to mere financial knowledge. This myopic conceptualization hampers the development of the concept and programs to build financial literacy. Despite research that reveals these limits, the field has either persisted with this narrow definition of financial literacy or abandoned the model altogether in favor of capability or similar constructs. Using Bloom's domains of knowledge, we redefine financial literacy as the combination of three different indicators reflecting three domains of knowledge: financial skill, self‐efficacy, and explicit knowledge. Using data from a national survey, we apply the methods of formative scale development to construct and validate a more robust conceptualization and measurement of financial literacy. We explore how this financial literacy index might inform development of innovative financial education programs.     

Testing a Measurement Model of Financial Capability Among Youth in Ghana

Youth may benefit from having enhanced financial knowledge and skills and access to financial services to help them navigate transitions to adulthood, though reliable and valid measures of youth financial capability to help assess financial education and inclusion intervention outcomes are lacking. Using survey responses from 5,451 youth ages 12–18 in Ghana, we used exploratory and confirmatory factor analysis to assess 18 survey items concerning youth financial behavior and understanding and attitudes concerning financial services. A 12‐item, group invariant scale (α = .72) with three latent factors was retained in a well‐fitting model that may help practitioners assess financial education and inclusion outcomes. We found that six items were poor indicators of youth financial capability, possibly because these items measure other constructs like numeracy, or because these items were not sufficiently assessed for developmental and cultural validity using qualitative methods like cognitive interviewing.     

Financial Literacy and Self‐Employment

In this paper, we study the relationship between financial literacy and self‐employment. We use established financial literacy questions to measure literacy levels. The analysis shows a highly significant and positive correlation between the index and self‐employment. We address the direction of causality by applying instrumental variable techniques based on information about maternal education. We also exploit information on financial support and family background to account for concerns about the exclusion restriction. The results provide support for a positive effect of financial literacy on the probability of being self‐employed. As financial literacy is acquirable, the findings suggest that entrepreneurial activities might be increased by enhancing financial literacy.     

Financial Literacy 501

The articles in this special issue of The Journal of Consumer Affairs focus on financial literacy. The scope of the content spans conceptualization and measurement as well as factors influencing financial literacy and its impact. This editorial prelude suggests one way that educators might use this issue as well as a previous (Summer 2008) special issue of the journal that also focused on financial literacy.     

Presentation Format and Financial Literacy: Accessibility and Assessability of Retirement Savings Statements

While increased financial literacy may improve individual retirement savings decisions, modifying the placement of key information in retirement savings statements can produce further improvements. We examined the extent to which placement of information and financial literacy affected the accessibility of information for individuals and assisted in their financial decision making. We also disaggregated financial literacy into numeracy and knowledge to identify key drivers. Using an experimental design, we find the increased salience resulting from modifying the presentation format improved participants' ability to locate important information (accessibility) and to evaluate the relative performance of funds (assessability). However, the incremental benefits of placement are only found for individuals with moderate numeracy skills. We conclude there is value accruing from financial literacy programs as advocated by regulators, but suggest additional benefits may be reaped from focusing on numeracy skills and from using presentation formats that improve information accessibility and assessability.     

Give mind to the gap: Measuring gender differences in financial knowledge

Prior research consistently finds a gender gap in financial knowledge where males appear to outperform females. Despite the wealth of studies attempting to explain this gap, none have considered whether the gender gap may be a product of measurement method. This study re-examines the gender gap with item response theory (IRT) which can account for guessing behavior and differential item functioning. Survey data on 184,869 individuals from 39 countries and territories is analyzed. Results show that when IRT is employed, a gender gap exists in only 54% of the sample. In contrast, when a conventional measurement approach is used, there is a gender gap in financial knowledge in 81% of the sample. These results reveal that prior measurements may underestimate women's financial knowledge and inflate the gender gap.     

Financial Adviser Anxiety,Financial Literacy,and Financial Advice Seeking

Seeking professional financial advice to assist with financial decision making is an important option for consumers faced with increased responsibility for their own financial circumstances. We explore the role of two potential barriers/enablers to accessing financial advice. First, we explore the role of a variety of financial literacy measures to explain observed financial advice consultation. Second, we introduce a newly developed measure of financial adviser anxiety. We define adviser anxiety as (an existing or prospective clients') concerns involving the prospect of meeting with a financial adviser. The notion of adviser anxiety is inspired by evidence from medical settings that suggest individuals may refrain from seeking advice when objectively, it is in their best interests to do so. This anxiety may be due to embarrassment, worry, or other forms of apprehension associated with the consultation process. A new scale is presented which has strong validity and a demonstrated ability to explain reported future levels of professional advice seeking.     

Money talks – a program to improve financial literacy of teens

Many researchers have studied and documented the financial literacy of youth. Even more have developed educational programs or curricula to teach financial and consumer issues to youth; however, few have actually evaluated the effectiveness of their programs. The Money Talks: Should I be Listening? curriculum, developed by a University of California Cooperative Extension team, was created to appeal to teenagers as it increased their financial literacy. In order to develop a program that young people would readily use, and from which they would learn, teenagers were surveyed prior to program development to determine the topics that were relevant to them, the educational format that appealed to them, and when and where they preferred to receive the information (Varcoe, Peterson, Garrett, Martin, Rene, & Costello, 2001). This paper discusses the effectiveness of The Money Talks: Should I be Listening? curriculum on the financial knowledge and behaviour of participants using the series. The curriculum was designed for use as a part of school curriculum as well as for presentation in other venues. The findings indicate that using the curriculum did improve the financial literacy of high school students with significant positive changes in both knowledge and behaviour. They have a better understanding of the value of savings and have changed behaviours. It is interesting to note that the males demonstrated a significantly greater increase in knowledge from pre‐test to post‐test than females. Perhaps the females have more interest in or knowledge of financial issues prior to participation in this project? Overall the results of this study are consistent with the findings of others. Research based curricula in personal finance seem to yield results. This age group has specific requirements for method of delivery and location of the seminars suggesting that it is important to keep the materials interactive. To address this issue, a web‐site http:www.moneytalks.ucr.edu was added to the program. Included on the web‐site are interactive games and a video on the importance of saving. The teens are naturally more interested in learning about the consumer and financial issues they perceive as salient in their lives at that particular time. Educators should identify topics of interest to the teens and develop, or use existing, interactive methodology to present the information.     

Financial literacy among university students: A study in eight European countries

This study analysed the level of financial literacy among university students in Estonia, Germany, Italy, Netherlands, Poland, Romania, Russian Federation and Turkey. The purpose of the study was to determine the level of financial literacy among university students, and to find out the relationship between financial knowledge and demographic characteristics of students. Online survey instrument was used to collect data. 409 fully completed questionnaires were accepted for analysis. Logistic regression was used to analyse of impact of the demographic characteristics on financial literacy. Overall mean of correct answers for the survey was 72.2%. This result represents a medium level of financial literacy about personal finance. Results indicate that male students, business major students, PhD students, those who live in a rental house, those whose parents have high level income, those who get advice on financial matters from their friends, those who took financial course before, those who get financial information about financial issues from university education, and students from Poland are more knowledgeable on personal finance. More financial courses should be provided in university education programmes, which could help more students handle their finances better and improve their financial wellbeing. It should be taken into consideration that in recent years, environmental and technological influences on financial literacy may be more important than parental influence.     

Financial literacy and the cost of borrowing

This research investigates the relation between financial literacy and the cost of borrowing via credit cards and mortgage loans among US consumers. This is a departure from previous studies that have focused on levels of debt in relation to human capital, either financial knowledge or education. Data from the Consumer Finance Monthly (CFM) survey are used to specifically examine the effect of financial literacy on borrowing rates for credit cards and mortgages controlling for other human capital influences. The CFM is a national survey, rich in American consumer credit information, and includes a comprehensive instrument specifically designed to measure financial literacy. Results indicate that those who are financially literate are about twice as likely to have lower costs of borrowing for both credit cards and mortgage loans.     

Financial literacy education and behaviour unhinged: combating bias and poor product design

The growth of products available in the consumer financial market has provided more choice and formal control over household financial decisions than ever before. Financial literacy education programs are generally assumed to improve consumer behaviour in relation to financial products and services. However, there is scant evidence that demonstrates the causal link between education, literacy and behaviour. Through the use of a sample study, we show that the actions of individuals who are financially literate do not necessarily mean they will demonstrate good financial behaviour. We propose that in order to improve the financial behaviour of consumers, two critical areas need to be addressed. Firstly, the objectives of financial literacy programs should be not only to educate consumers about financial markets and products but highlight to individuals the psychological biases and limitations that they as humans cannot easily avoid. Secondly, the regulation of financial products sold to consumers needs alteration to meet the aim of protecting retail consumers from complex financial products that are confusing, ambiguous and inappropriate. We propose regulation and redesign of product information offerings using techniques employed in ecological interface design models to derive a suitability test for consumer financial products.     

Financial Vulnerability,Financial Literacy,and the Use of Digital Payment Technologies

The purpose of this study is to test the notion that the use of digital payment methods, such as paying with a mobile phone, increases the risk of financial vulnerability. Research from the USA indicates such a relationship, and we study whether this finding can be generalized to other countries. Motivated by recent changes in EU legislation related to financial transactions, we also examine willingness to use social media companies for money transfers along with sharing bank account information with third-party financial services. Exploiting data collected from a representative sample of the Norwegian adult population (n?=?2202), we identify differences in financial behaviour and characteristics between users and nonusers of different digital payment methods. In contrast to US studies, we find that mobile payment users were less financially vulnerable than nonusers and those women were more likely users of digital payment technologies than men. Younger generations and those with low financial literacy were more financially vulnerable than others, although we did not find this to be related to the use of mobile payment or other digital payment methods. The results show that there is a need for more research from different countries outside of the USA to obtain an understanding of the consequences of increased digitalization of financial services. In addition, as COVID-19 has shifted a vast amount of spending online and these newer payment technologies have become more available, we need to gain a better understanding of how they influence financial behaviour.

     

Financial literacy and high‐cost borrowing: Exploring the mechanism

Recent studies have suggested that financial literacy is an important determinant of informed borrowing decisions. Despite the evidence that financially literate consumers are less likely to use alternative financial services, the mechanism through which financial literacy discourages demand for alternative financial services has yet to be fully understood. The previous studies proposed several explanations, such as the ability to undertake complex financial calculations and understand contract terms, to link financial literacy to savvy credit choices. This study evaluates the validity of this argument by examining whether or not financial knowledge plays a greater role in borrowing decisions where consumers are forced to rely on financial knowledge. It is assumed that consumers in an information‐sparse environment have a greater incentive to utilize financial knowledge to infer the hidden cost of borrowing contracts. To test this argument, this study examines the extent to which information availability moderates the negative impact of financial knowledge on rent‐to‐own transactions. Information content is captured by state‐level disclosure mandates for rental contracts, given that consumer in a loosely regulated state are exposed to less pricing information. The results illustrate that limited information strengthens the negative association between financial knowledge and rent‐to‐own transactions. This confirms the previous arguments that consumers are active thinkers who refer to financial knowledge to estimate the overall cost of borrowing.     

Financial literacy: A comparative study across four countries

This study analysed differences in financial literacy across four countries: Canada, Italy, the UK and the US. The purpose was to understand whether factors associated with financial literacy in one country can be generalized to other countries as well or whether unique national characteristics make it necessary to examine financial literacy in each country individually. A financial literacy index, based on the number of correct answers to four multiple‐choice questions, was used to test the relevance of country of origin to financial literacy. Results suggest significant differences among countries indicating that there are national and cultural differences in what households know and need to know about their personal finances. Policy makers should consider these differences when developing financial literacy assessment tools for their respective countries.     

Measuring Financial Literacy

Financial literacy (or financial knowledge) is typically an input to model the need for financial education and explain variation in financial outcomes. Defining and appropriately measuring financial literacy is essential to understand educational impact as well as barriers to effective financial choice. This article summarizes the broad range of financial literacy measures used in research over the last decade. An overview of the meaning and measurement of financial literacy is presented to highlight current limitations and assist researchers in establishing standardized, commonly accepted financial literacy instruments.     

Financial Literacy: The Role of the Local Context

In this article, we investigate the role of local factors associated with the financial literacy of Italian adults (no. 945). Using a multilevel regression model, together with the common socioeconomic and sociodemographic variables already used in previous studies, we also add certain environmental variables at the local level. We separately analyze the three indexes that define the OECD financial literacy index—Financial Attitude Index (FAI), Financial Knowledge Index (FKI), and Financial Behavior Index (FBI)—because they show a dynamic of their own in each region. Our findings confirm that the FKI and the FAI are associated to some extent with environmental traits, while the FBI is not. We conclude that not only the sociodemographic and socioeconomic conditions of individuals but also certain features of the regional context where they live have an impact on their financial literacy. Consequences for financial education programs are highlighted.     

Financial Literacy and Neighborhood Effects

This study uses data from the 2009 and 2012 waves of the National Financial Capability Study to examine the effects of neighborhood characteristics on financial literacy. Controlling for individual characteristics, multivariate regression analysis shows that a zip code's education level has a significant impact on financial literacy. This finding is consistent with social learning as a mechanism of financial knowledge acquisition, with neighborhood education serving as a proxy for the level of financial knowledge of one's social network. Although social effects are not the only possible explanation for this finding, the result is robust even after controlling for a host of other factors such as getting advice from financial professionals, receiving financial education, and living in a zip code with greater employment in the financial industry. This study additionally documents that zip code education effects are present with various savings and credit measures.     

Financial Decisions and Financial Capabilities in the Andean Region

This paper analyzes the importance of numerical abilities, conscientiousness, and financial literacy for individuals' financial decision making and participation in formal financial markets. Our analysis is based on the Financial Capabilities Survey, which was applied in four countries of the Andean Region: Bolivia, Colombia, Ecuador, and Peru. The empirical analysis underlines the centrality of numerical abilities, different subfacets of conscientiousness (propensity to plan, perseverance, and scrupulosity), and financial literacy in developing a propensity to save and borrow, and in participating in the formal financial sector.     

Using the Right Yardstick: Assessing Financial Literacy Measures by Way of Financial Well‐Being

Despite the proliferation of academic studies examining financial literacy and financial outcomes, no consistent definition or empirically validated measures of financial literacy exist. While a handful of questions have become the standard measures of financial literacy in previous research, little work has been done examining whether responses to these questions accurately capture underlying financial capability, or whether they causally relate to subsequent financial well‐being. Taking advantage of longitudinal data from the Health and Retirement Study we examine whether some of the questions previously used as measures of financial literacy are consistent measures of financial knowledge and effective predictors of future changes in wealth. We find that respondents frequently do not consistently answer questions across survey waves and that the context in which a question is asked affects the likelihood of correctly responding. Moreover, our regression analyses suggest that correctly answering these questions, consistently or not, has little significant relationship to changes in wealth over time, and is often related to a decrease in future wealth. Our findings should give pause to researchers using the financial literacy questions examined here, particularly from cross‐sectional data.