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.     

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.     

Gender differences in financial knowledge,attitudes, and behaviors: Accounting for socioeconomic disparities and psychological traits

A large body of international research finds a persistent gender gap in the financial literacy of women compared to men, but explanations for this gap remain a topic of active debate. In this observational study, we explore the explanatory value of psychological characteristics, in addition to demographic variables and roles in household financial decision making. We begin by documenting the expected gender differences in financial knowledge, attitudes, and behaviors, using a national survey of adult Canadians (n = 21,789) that provides population-level estimates. Next, we contrast these results against a second Canadian survey data set (n = 3,502) where we are able to control for individual differences in psychological traits. Results of OLS regressions suggest that gender is not a significant predictor on three scales of financial capability. Decomposition analysis finds underlying differences in individual characteristics (endowments) explain the majority of the observed gender gap in financial literacy when psychological traits are included in the model.     

Sludged! Can financial literacy shield against price manipulation at the shops?

Retailers lure consumers with clever use of choice architecture; examples include “bargains” heavily restricted in the fine print and discounts structured to exaggerate the true saving. Given that financial literacy is a key competency for managing money, good financial literacy may provide protection from these “sludges.” In an exploratory experiment, we measure 48 university students' retail literacy and financial literacy, while concurrently tracking their emotional reactions and decision time using FaceReader software. We then test hypotheses on a larger sample using an online survey. We find that strong financial literacy supports retail literacy and vice versa, but the two constructs are distinct. The differences are identified through mathematical and methodological reasoning, gender, and emotion. While gender remains a factor for financial literacy, it is less prominent in retail literacy, and women respond more positively to retail literacy performance measurement. We recommend future investigation into building women's financial literacy performance using materials that are aesthetically pleasing and based on familiar financial frames and scenarios.     

Investigating the Disconnect between Financial Knowledge and Behavior: The Role of Parental Influence and Psychological Characteristics in Responsible Financial Behaviors among Young Adults

Financial knowledge is an essential component in financial decision making; however, knowledge is insufficient to ensure responsible financial behavior. We investigate the weak association between financial knowledge and behavior by simultaneously testing the roles financial knowledge, parental influence, and individual psychological characteristics (self‐discipline and thoroughness) play in young adults' financial behaviors. Results from 2,712 respondents from the 1997 National Longitudinal Survey of Youth confirm there is a weak association between financial knowledge and behavior. Parental influence and self‐discipline positively associate with responsible financial behavior. We also investigate the moderating role of gender and observe that financial knowledge and parental influence improve women's financial behavior more than men, whereas being thorough has a larger impact among males. These findings suggest that considering social and individual psychological factors in financial education programs could improve program efficiency. The results also highlight the importance of adopting tailored financial education to suit gender differences.     

Gender differences in recollections of economic socialization,financial self-efficacy,and financial literacy

The OECD/INFE international surveys of adult financial literacy (OECD/INFE 2016, 2020) show gender differences in financial literacy in developed countries in Europe. In this study, we examine whether these differences can be explained by gender differences in parental economic socialization using the Dutch 2018 DHS household survey. We investigate whether respondents' recollection of economic socialization when young predict their adult economic behavior and self-assessed financial knowledge. The results from ordinal logit and logistic regressions and for nonlinear equations decompositions reveal gender differences in the recollection of economic socialization and in how socialization practices are related to economic behavior and self-assessed financial knowledge. Men have to a greater degree than women been socialized in terms of having paid work outside the home, while women more often than men report that their parents controlled their spending. Moreover, we find gender differences in how men and women benefitted from the same socialization practices.     

Financial knowledge among Iranian investors

This research is the first to describe financial knowledge in the Islamic Republic of Iran. Data were collected from a convenience sample of investors in the Tehran Stock Exchange. The data were used to examine objective and subjective knowledge as well as overconfidence in one's financial knowledge. The results indicated that compared with other populations, Iranians did not perform well on either basic or advanced financial knowledge questions, especially when the questions dealt with interest rates. This is likely related to the Islamic law ban on usury‐based investing. Regression analysis indicated that demographic charactristics related to basic financial knowledge were income, labour force status and being a student. Demographic characteristics related to advanced financial knowledge were education, labour force status and age. Higher income and education reduced the odds of being overconfident about one's financial knowledge, while being a student and male increased the odds. The article concludes with recommendations about future research as well as building a national financial education strategy.     

Gender differences in financial socialization in the home—An exploratory study

Recent literature has stressed the need for research examining the causes of females in general having lower levels of financial literacy than males. This article uses social cognitive theory of gender development as a framework to propose differing financial socialization of children in the home by gender as a possible cause of gender differences later in life. Evidence is found of gender based differences in the financial socialization of eleven and twelve year olds. Findings include more frequent parent‐child discussions being correlated to more positive financial attitudes, but not to saving behaviour. Saving behaviour of children is influenced by attitudes to money along with the presence of parents when spending, which is subject to a same sex gender bias for girls, with large effect sizes. Girls are over 200% more likely to state they save some of their pocket money if their mother is present when they spend their pocket money, compared to having no parent present. This difference does not exist for male children. When a boy is with both parents when spending, they are 245% more likely to report saving some of their pocket money then when neither parent is present. Having a father present when spending does not yield significantly different results to when no parent is present. These findings of gender biased financial socialization in the home are important considerations for the design of school‐based financial literacy programmes. Specifically, these programmes should consider a goal of encouraging discussion and questioning gender based attitudes and roles in the home. They are also important findings in terms of going some way to explaining the existence of a gender difference in financial knowledge in adulthood.     

Financial Knowledge and “Don't Know” Response

We investigate the effect of group characteristics and educational interventions on young respondents' objective financial knowledge level. We examine six questions about personal finance and covariates selected from the 2015 National Financial Capability Study. Because these questions include “Don't Know” or “Refuse” (DK/RF) responses, a simple regression model could cause researchers to reach misleading conclusions if DK/RF responses are not random. Thus, we suggest a binomial‐latent regression model to evaluate the effect of educational interventions and group differences that are hidden in DK/RF responses. The estimation result shows that rejecting financial education opportunities is disadvantageous to obtaining proper financial knowledge. In addition, both formal and informal financial education are less effective in improving objective financial knowledge in our preferred model. We also find few or no gender, income, and age differences in young adults' objective financial knowledge level after controlling for financial education interventions.     

Debt Literacy and Debt Literacy Self‐Assessment: The Case of Poland

It is well documented that financial literacy is at best moderate around the world and that the cost of ignorance in this field may be high on both microeconomic and macroeconomic levels. We surveyed a representative sample of Poles to measure their debt literacy—a little‐studied aspect of financial literacy—and therefore obtain insight into the factors predicting it. Our study evidenced low levels of debt literacy and its overestimation by respondents in their self‐reports. We also confirmed some of the patterns found in former studies, including the gender gap and a positive relationship between the level of educational attainment and debt literacy. Finally, our examination provides compelling outcomes with regard to the segmentation of the sample on the basis of objective and subjective debt literacy scores. They show large heterogeneity of debt literacy and thus confirm the need for far‐reaching customization of debt‐oriented education.     

Gender differences in knowledge and attitude regarding breastfeeding

The literature presented evidence that the opinions and attitudes of the father or male partner towards breastfeeding have a strong positive correlation with breastfeeding initiation and duration. Men are also found less knowledgeable about breastfeeding and are more positive towards formula feeding than women. Using a survey of college‐aged men and women, this study provides in‐depth understanding of gender differences in knowledge and attitude regarding breastfeeding. The Infant Feeding Knowledge Test and the Iowa Infant Feeding Attitude Scale were included in the questionnaire in addition to questions about the respondents' intention to breastfeed, exposure to breastfeeding during infancy and socio‐demographic characteristics of the family of origin. The final sample consists of 181 women and 88 men enrolled in a university in the Southern US. Linear regressions with gender interaction terms were estimated in order to isolate the gender‐specific correlations between their family background and their knowledge and attitude regarding breastfeeding. A series of Chi‐square tests examined whether the regression coefficients were significantly different between men and women. Results support existing evidence of gender gap in breastfeeding knowledge and attitude. More importantly, the study reveals that the influence of one's family background on their knowledge and attitude regarding breastfeeding is significantly different between men and women. It suggests a possibility of greater disagreement regarding feeding choices within a higher socioeconomic status (SES) couple. Theoretical and practical implications of the findings are discussed.     

Financial Knowledge and Child Development Account Policy: A Test of Financial Capability

This study examines how study participants' financial knowledge and participation in a Child Development Account intervention affects 529 College Savings Plan account holding among caregivers of infants. The study uses data from the SEED for Oklahoma Kids (N = 2,651), a statewide randomized experiment using a probability sample of infants selected from birth records. Results of logit regression show that participants' financial knowledge is positively related to account holding in the treatment group but not in the control group. The interactive effects between financial knowledge and treatment status are statistically significant. This finding implies that the effect of financial knowledge on financial decisions related to college savings is moderated by institutional features, such as incentives, information and access. Results of this study support the propositions of financial capability and suggest that expanding financial capability requires both improved individual financial knowledge and supportive policy .     

How Financially Literate Are Women? An Overview and New Insights

We document strikingly similar gender differences in financial literacy across countries. When asked to answer questions that measure knowledge of basic financial concepts, women are less likely than men to answer correctly and more likely to indicate that they do not know the answer. Both young and old women show low levels of financial literacy. Moreover, women for whom financial knowledge is likely to be very important—for example widows or single women—also know little about concepts relevant for day‐to‐day financial decisions. The gender differences are present for very basic as well as more advanced measures of financial literacy. This is important because financial literacy has been linked to economic behavior, including retirement planning and wealth accumulation. Women live longer than men and are likely to spend time in widowhood. Thus, improving women's financial literacy is key to helping them prepare for retirement and promoting their financial security.     

What Explains the Gender Gap in Financial Literacy? The Role of Household Decision Making

Using newly collected data from the RAND American Life Panel, we examine potential explanations for the gender gap in financial literacy, including the role of marriage and who within a couple makes the financial decisions. Blinder–Oaxaca decomposition reveals the majority of the gender gap in financial literacy is not explained by differences in the characteristics of men and women—but rather differences in coefficients, or how literacy is produced. We find that financial decision making of couples is not centralized in one spouse although it is sensitive to the relative education level of spouses.     

Young People Are the Front Lines of Financial Inclusion: A Review of 45 Years of Research

Amidst concerns about percentages of households that remain unbanked or underbanked, policy endeavors have emerged to promote financial inclusion by making financial products such as savings accounts readily available. While these endeavors have primarily concentrated on households, young people may be the front lines of financial inclusion because they may be more likely to be banked in young adulthood and beyond when they start off with savings accounts earlier in life. This article addresses young people's financial inclusion by comprehensively reviewing 60 research studies on young people's savings, discussing the role of the family in young people's financial inclusion, discussing financial inclusion from an institutional perspective, presenting policy implications, and identifying gaps in knowledge and opportunities for research. Policies that open savings accounts for young people early in life may be a promising strategy for extending financial inclusion and preventing unbanked or underbanked status later in life.     

Detecting gender item bias and differential manifest response behavior: A Rasch-based solution

Although gender is a salient variable in consumer research, researchers largely overlook whether, and how, it influences consumer response to indicators measuring latent variables. The authors therefore extend the framework of measurement equivalence assessment to the largely overlooked issue of differential item response behavior between men and women. This paper demonstrates the efficacy of using item response theory to investigate the presence of gender item bias. This methodological approach affords researchers the means of objectively disentangling actual gender differences and gender bias. Ignoring the possibility of gender item bias has the potential to bias means and thereby compromise any substantive gender-based mean comparisons. The authors conclude with solutions to address gender item bias both pre and post survey construction.     

The Links between Early‐Life Cognition and Schooling and Late‐Life Financial Knowledge

Using the Wisconsin Longitudinal Study, a sample of Wisconsin high school graduates from the class of 1957, we explore the relationship between late‐life financial knowledge and human capital formed in early life. Specifically, we examine the associations between early‐life cognition and schooling experiences—such as academic performance and coursework—and late‐life financial knowledge. Financial knowledge is measured as individuals' knowledge of their own financial situations, which we argue is a prerequisite for good financial behavior. We find that those with lower early‐life cognitive functioning, especially those without college degrees, have lower levels of financial knowledge in late life. We find more limited evidence for independent associations of academic performance and math course work with late‐life financial knowledge.     

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.     

Financial Attitudes in Family Firms: The Moderating Role of Family Commitment

This study investigates how family commitment moderates whether and how financial knowledge, positive experience with debt suppliers, and economic goal orientation affect owner–managers' attitudes toward debt financing in family firms. Using a sample of 280 German family firms, we find significant relationships between both financial knowledge and positive experience with debt suppliers and owner–managers' financial attitudes toward debt. Our findings show that family commitment moderates these relationships such that high family commitment increases the impact of prior experience with debt suppliers, though the effect of economic goal orientation is lowered and reversed. Overall, we contribute to research on financial decision making, capital structure, and social capital in family firms.     

The influence of consumer socialisation in the home on gender differences in financial literacy

The lower level of financial literacy amongst females relative to males has been well documented in the literature. There has however been a less than compelling argument constructed as to why this discrepancy occurs. This article introduces findings showing the influence the home, particularly financial discussions in the home, has on the financial literacy levels of children and young adults. A key finding is that males have their first financial discussion in the home at a younger age than females on average, with this differential statistically significant across students of differing socioeconomic status. For males, the age of the child when they have their first financial discussion in the home influences their financial literacy levels some years later at university, even accounting for other variables such as socioeconomic status. The findings of this article suggest that financial socialisation in the home may be subject to a gender bias, which over time contributes to differential financial literacy knowledge levels between the genders.