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 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 Literacy among the Young

We examined financial literacy among the young using the most recent wave of the 1997 National Longitudinal Survey of Youth. We showed that financial literacy is low; fewer than one-third of young adults possess basic knowledge of interest rates, inflation and risk diversification. Financial literacy was strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a college-educated male whose parents had stocks and retirement savings was about 45 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy.     

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.     

Financial Literacy and Preparation for Retirement

To meet the challenges of an ageing population, eligibility ages for state pensions have increased, early retirement arrangements have been abolished, and a substantial part of the risk and responsibility for an adequate standard of living after retirement has been shifted from the government, employers and pension funds to individuals and private households. Consequently, policy makers have become more concerned with whether individuals are able to make pension-related decisions that are in their own best interest.     

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 and Retirement Preparedness: Evidence and Implications for Financial Education

Economists are beginning to investigate the causes and consequences of financial illiteracy to better understand why retirement planning is lacking and why so many households arrive close to retirement with little or no wealth. Our review reveals that many households are unfamiliar with even the most basic economic concepts needed to make saving and investment decisions. Such financial illiteracy is widespread: the young and older people in the United States and other countries appear woefully under-informed about basic financial concepts, with serious implications for saving, retirement planning, mortgages, and other decisions. In response, governments and several nonprofit organizations have undertaken initiatives to enhance financial literacy. The experience of other countries, including a saving campaign in Japan as well as the Swedish pension privatization program, offers insights into possible roles for financial literacy and saving programs. JEL Classification A2, G2     

西宁市居民家庭金融素养调查影响研究

金融素养是近年来消费者金融研究的一个新兴领域,这不仅仅是消费者金融知识的积累,更是消费者进行金融实践的指向标,能够促使消费者做出正确的金融决策并实现其财产的保值升值。文章以西宁市为例,通过问卷调查分析发现居民家庭金融素养的总体水平偏低,金融知识匮乏,缺少必备的金融技能,并针对此问题提出相关对策。     

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: 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.     

Service-Learning and Leadership: Evidence from Teaching Financial Literacy

We provide an empirical investigation of leadership characteristics and social justice issues in the context of financial literacy service-learning. Using a unique dataset of student self-ratings, we find that students experience statistically significant increases in 8 of the 10 leadership dimensions and 7 of the 7 social justice issues examined in this study. Leadership dimensions include: persuasion, building community, “commitment to the growth of people,” stewardship, empathy, awareness, foresight, and listening. Interest in social justice issues include: dignity of the human person, community and the common good, rights and responsibilities, option for the poor, dignity of work, solidarity, and care for God’s creation. The statistically significant increases in these dimensions following the completion of the service-learning suggest positive effects on students’ self-perception of leadership qualities and interests in social justice issues: business school students sense improvement in nurturing growth of employees and colleagues, commitment to serving the need of others, understanding and empathizing with others, ethics, ability to foresee the likely outcome of a situation, and listening intently to others. As a consequence of the financial literacy service-learning, we believe that business students become more prepared toward becoming ethical leaders and citizens with compassion to serve the world for the well-being of all people, rich and poor alike.     

Racial Differences in the Returns to Financial Literacy Education

We examine financial literacy and the returns to financial literacy education, specifically focusing on the racial financial literacy gap. We confirm evidence that whites have higher financial literacy scores relative to minorities and that financial literacy increases with participation in financial literacy education. However, we find the benefit of participation in financial literacy education is higher for whites than that for minorities. Thus, the impact of being white alone persists, indicating a racial financial literacy and/or behavioral difference despite financial literacy education. Our findings have implications for policymakers interested in narrowing the racial wealth gap via financial literacy education.     

Financial Inclusion in Rural Uganda: Testing Interaction Effect of Financial Literacy and Networks

ABSTRACT

Based on the premise that financial literacy take place in networks to influence the level of financial inclusion, the study examined whether networks moderate in the relationship between financial literacy and financial inclusion among poor households in rural Uganda. Studies have revealed that financial literacy affects the level of financial inclusion. However, these studies have failed to incorporate the moderating role of networks in the relationship between financial literacy and financial inclusion. The results showed that networks positively and significantly moderates in the relationship between financial literacy and financial inclusion with both financial literacy and networks having direct and significant effects.     

Errare humanum est: Financial Literacy in European Consumer Credit Law

Examples of financial mistakes made by consumers lend support to the view that systematic mistakes of consumers exist in the EU credit market and that service providers respond strategically to these by redesigning their products. This paper seeks to determine how existing regulation can be improved to ensure consumer protection. Using insights from behavioural economics, this paper argues that financial literacy??that is, knowledge and understanding of complex financial products and skills to navigate the financial market??as a cornerstone for European financial consumer law is problematic. Current regulation is based primarily on information provision to consumers, which should enable them to make appropriate decisions about the risks and suitability of financial products. Although behavioural economics does not necessarily require legal intervention to take other forms than the introduction of information duties, the type of intervention is dependent on the design and needs of a particular market. The EU consumer credit market, in our view, demands more than the current regulation offers in terms of consumer protection. In particular, behavioural studies reveal that consumers generally do not have a sufficient level of financial literacy in order to enable them to make informed, rational decisions. Moreover, behavioural biases have a distorting influence on consumer decision making. The law as it stands, therefore, seems ill-equipped to offer protection to consumers and to prevent them from rash and bad decision making. Reviewing existing regulation and case law, we propose that in the EU law, the Consumer Credit Directive and the Markets in Financial Instruments Directive require updating in order to offer sufficient protection to vulnerable groups of consumers who, on average, have low levels of financial literacy.     

Conscientiousness,Financial Literacy,and Asset Accumulation of Young Adults

This study utilizes the 1997 National Longitudinal Survey of Youth to examine the relationship between financial literacy, conscientiousness, and asset accumulation among young adults. Findings indicate that both conscientiousness and financial literacy are consistent predictors of asset accumulation among young Americans. A one‐standard‐deviation increase in conscientiousness is correlated with a 40% increase in net worth, a 53% increase in illiquid asset holdings, and a 33% increase in liquid asset holdings. A one‐standard‐deviation increase in financial literacy is correlated with a 60% increase in illiquid asset holdings and a 30% increase in liquid asset holdings. Financial literacy moderates the effect of conscientiousness on net worth. These findings suggest that conscientiousness and financial literacy are important factors and that policies and programming with a dual emphasis on increasing conscientiousness and financial literacy are likely to have a positive impact on consumer savings and asset‐building.     

The Financial Knowledge Scale: An Application of Item Response Theory to the Assessment of Financial Literacy

Despite increasing interest in and funding for financial literacy and financial education programs in the private and public sectors, the field of financial literacy still has a major obstacle to overcome: the lack of a widely disseminated measure of financial literacy, developed through rigorous psychometric analyses. In this article, we develop such a measure, focusing specifically on financial knowledge. Using item response theory (IRT), we analyze items from three national surveys, resulting in a psychometrically sound 20‐item financial knowledge scale. By using IRT, the current analysis uses individuals' answers to inform which questions to include in the scale in the first place, rather than simply confirming relationships between these answers and other financially relevant outcomes post hoc. Widespread use of this index and the continued use of modern psychometric techniques would allow for the comparison of financial knowledge, measured consistently and reliably, across studies, populations, and programs.     

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.     

Financial Literacy Skills for the 21st Century: Evidence from PISA

I am delighted to be asked to give the Colston Warne Lecture at the American Council on Consumer Interests annual conference. What I want to cover in this lecture is what I consider to be one of the most important topics for consumers: financial literacy. This topic is particularly important for the young, and in this lecture, I will describe the findings from the first international survey on financial literacy among high school students: the Programme for International Student Assessment (PISA). I am honored to chair the financial literacy expert group that designed the financial literacy assessment in PISA. Our journey to design that assessment included meetings in many countries and lasted for several years. It is one of the works I have enjoyed the most. I hope the findings from PISA will be a catalyst for changes in education policies, including adding financial literacy to school curricula.     

How Much Does Wealth Matter in the Acquisition of Financial Literacy?

The acknowledged widespread lack of financial literacy casts serious doubts on the ability of individuals to make financial decisions. Some studies suggest that financial experience can affect financial knowledge and that household financial wealth can be a factor leading to the acquisition of financial literacy. This article investigated the determinants of financial literacy using the 2006 wave of the Italian survey on household income and wealth. Empirical results indicated that wealth has a positive but small effect on the degree of financial knowledge.     

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.