This study isolates the causal effects of financial literacy and schooling on wealth accumulation using a new household dataset and an instrumental variables (IV) approach. Financial literacy and schooling attainment are both strongly positively associated with wealth outcomes in linear regression models, whereas the IV estimates reveal even more potent effects of financial literacy. They also indicate that the schooling effect only becomes positive when interacted with financial literacy. Estimated impacts are substantial enough to imply that investments in financial literacy could have large wealth payoffs.
How Financial Literacy Affects Household Wealth Accumulation
Jere R. Behrman, Olivia S. Mitchell, Cindy K. Soo, and David Bravo*
Corresponding Author: Olivia S. Mitchell
2012 AER Papers and Proceedings
Session Title: The Effects of Financial Education and Financial Literacy
Session Chair: B. Douglas Bernheim
Discussants: Justine Hastings, William Walstad, Urvi Neelakantan, Annamaria Lusardi
January 6, 2012
* Behrman: Dept. of Economics and Sociology, School of Arts and Sciences, University of
Pennsylvania, 3718 Locust Walk, 160 McNeil, Philadelphia, PA 19104 (email:
jbehrman@econ.upenn.edu); Mitchell: Wharton School of the University of Pennsylvania, 3620
Locust Walk, 3000 SH-DH, Philadelphia, PA 19104 (email: mitchelo@wharton.upenn.edu);
Soo: Wharton School University of Pennsylvania, 3620 Locust Walk, 3000 SH-DH,
Philadelphia, PA 19104(email: csoo@wharton.upenn.edu); Bravo: Centro de Microdatos,
Universidad de Chile, Diag Paraguay #257, Torre 26, Santiago, Chile (email:
dbravo@econ.facea.uchile.cl). The authors acknowledge support from the TIAA-CREF Institute,
the Pension Research Council and Boettner Center at the Wharton School of the University of
Pennsylvania, and NIH/NIA grant AG023774-01(P.I. Petra Todd) on “Lifecycle health, work,
aging, insurance and pensions in Chile.” They also thank Luc Arrondel, Alex Gelber, Jeremy
Tobacman, Javiera Vasquez, and participants in the Wharton Applied Economics doctoral
workshop as well as the 2010 LBS TransAtlantic Doctoral Conference for helpful comments,
and Richard Derrig for sharing his PRIDIT code. Opinions and errors are solely those of the
authors and not of the institutions providing funding for this study or with which the authors are
affiliated. ©2012 Behrman, Mitchell, Soo, and Bravo. All rights reserved.
How Financial Literacy Affects Household Wealth Accumulation
This study isolates the causal effects of financial literacy and schooling on wealth accumulation
using a new household dataset and an instrumental variables (IV) approach. Financial literacy
and schooling attainment are both strongly positively associated with wealth outcomes in linear
regression models, whereas the IV estimates reveal even more potent effects of financial literacy.
They also indicate that the schooling effect only becomes positive when interacted with financial
literacy. Estimated impacts are substantial enough to imply that investments in financial literacy
could have large wealth payoffs.
Traditional economic theory posits that forward-looking individuals maximize expected
lifetime utility using economic information to build retirement assets over their worklives. Yet
fewer than half of Americans have even attempted to estimate how much money they might need
in retirement, and many older adults face significant retirement saving shortfalls (Annamaria
Lusardi and Olivia S. Mitchell 2007a, b). Economic explanations for these shortfalls include
dispersion in discount rates, risk aversion, and credit constraints, but the empirical literature thus
far has been unable to account for much of observed wealth differentials (Douglas Bernheim,
Jonathan Skinner, and Steven Weinberg, 2001).
Here we evaluate whether people who find it difficult to understand their financial
environment are also less likely to accumulate wealth; our approach examines links between
wealth accumulation, and financial literacy, by which we mean the ability to process economic
information and make informed decisions about household finances. Others report positive
correlations between financial literacy and asset accumulation, but questions have been raised
about whether these associations reflect causality (Lusardi and Mitchell 2008, 2010). For
example, individuals who fail to save due to some underlying and usually unobservable factor
such as impatience may also be financially illiterate due to the same factor, making it difficult to
assess whether boosting financial education would, in fact, enhance household wealth
Moreover, in simple bivariate associations of financial literacy with wealth,
financial literacy might be proxying, in part, for other factors such as schooling attainment.
This paper makes three important contributions. First, we develop a new measure of
financial literacy that aggregates a more complete set of financial literacy questions, and that can
For example, Justine S. Hastings and Mitchell (2011) show that both impatience and financial
literacy are strongly correlated with retirement saving.
also be disaggregated to examine which aspects of financial literacy have greater marginal
influences on household wealth. Second, we draw on a unique microeconomic dataset, the
Chilean Social Protection Survey (see www.microdatos.cl), to evaluate the effects of financial
literacy for a richer range of ages and schooling than heretofore available.
Third, we use a set of
plausibly exogenous instrumental variables to control for both omitted variable and random
measurement error biases and show that financial literacy is still positively, significantly and
substantially associated with wealth outcomes even after controlling for schooling.
Our results are relevant for financial educational policy, in that we find that improved
financial literacy can make a significant difference for financial behavior, above and beyond
regular schooling. This rigorous analysis of the impact of financial literacy on wealth
accumulation should be useful in informing governments and their policy advisers, as they
consider new initiatives for financial education.
I. Financial Literacy Metrics
We measure financial literacy using a rich set of 12 questions. The “core” first three
financial literacy queries were developed and implemented in the United States Health and
Retirement Study (HRS); they have also been adopted by several other international surveys. A
second, more “sophisticated,” set of three questions was devised for a special HRS module
(Lusardi and Mitchell, 2007c) to measure more complex concepts such as compound interest,
inflation, and risk diversification. A final set of questions touches on key aspects of the Chilean
retirement system, including the mandatory contribution rate, minimum male and female
retirement ages, how pension benefits are computed, whether people know about the welfare
program for the elderly, and whether people know they can contribute to a Voluntary Pension
system (precise question wording and a full explanation of the approach is provided in Jere
Behrman et al., 2010).
As found in the United States, the Chilean EPS reveals that many respondents possess
little understanding of basic economic concepts and know little about the pension system. Only
half knew the correct answers to the core questions, and fewer could answer the sophisticated
financial literacy questions. Patterns are more variable for questions regarding knowledge of
pension system benefit rules and provisions: most knew the legal retirement ages, but only about
one-third knew contribution rates and only 10 percent could explain how benefits are computed.
About half the sample knew about both the guaranteed minimum benefit and the Voluntary
Savings plan.
While prior authors measure financial literacy by coding a binary outcome to one or two
key questions, we seek to use all the rich information available. Accordingly we aggregate
responses using a two-step weighting approach called PRIDIT.
The first step weights each
question by difficulty, applying a greater penalty for not answering correctly a question that
more of the population answers correctly but greater credit for answering correctly questions that
more respondents answer incorrectly. The second step applies principal components analysis to
take into account correlations across questions. The resulting PRIDIT scores indicate how
financially literate an individual is in relation to the average population and to specific questions
asked; it takes into account the fact that questions are more informative, ceteris paribus, the less
their answers are correlated with other questions. The final PRIDIT weights indicate how
“informative” any given question is regarding the underlying latent financial literacy variable,
The PRIDIT approach was developed by Patrick Brockett et al. (2002) to handle binary or
categorical indicators that proxy for a handle difficult-to-observe dependent variable.
relative to other questions. We find that the ‘core’ HRS financial literacy questions receive the
greatest weights, while the next most informative are the queries on pension system knowledge.
Some of the least informative include detailed knowledge on how to calculate pension benefits.
II. Data and Background
Our primary data source is the Social Protection Survey (Encuesta de Protecion Social,
EPS) we developed in collaboration with the Microdata Center of the University of Chile (David
Bravo et al. 2006). Comparable to the HRS, it provides a nationally-representative stratified
random survey covering wealth, schooling, financial literacy, work history, childhood
background, and selected personality traits. In contrast to the HRS, however, the EPS covers all
adults, not just respondents age 50+. In what follows, we limit our attention to 13,054 prime-age
respondents surveyed in 2006, namely men age 24-65 and women age 24-60.
Our outcomes of interest are total net wealth and its components: pension wealth, net
housing wealth, and other wealth. Pension wealth averages $38,600, or 54 percent of total net
wealth. In 1981, the Chilean government adopted a national, mandatory defined-contribution
scheme known as the AFP system; the reform required all new formal sector employees to
contribute at least 10 percent of their salaries to one of several licensed defined-contribution
pension plans.
We believe pension wealth is reported relatively accurately because respondents
receive annual government statements outlining their pension system accruals. Net housing
wealth is based on self-reported data on market values minus estimated mortgage debt. Other
In Chile the legal retirement age is 60 for women but 65 years for men.
Those who started working prior to 1980 could elect to join the new scheme or remain in the
previous system.
net wealth includes self-reported business wealth, agricultural assets, other real estate assets, and
financial investments, subtracting all forms of household debt.
In addition to these wealth measures, we also explore two possible channels via which
financial literacy and schooling might affect pension wealth, in particular. The first is an
indicator of worker attachment to the pension saving, or the “density of pension contributions
defined as the fraction of months an individual contributed to the pension system from age 18 to
the survey date. A second channel is whether the individual had attempted to calculate the money
needed for retirement.
Our primary explanatory variable in addition to financial literacy is schooling attainment
(measured conventionally). Primary school refers to grades 1-8, secondary school to grades 9-13,
and post-secondary school to grades beyond that, to a maximum of 20. The average schooling
attainment in our sample is 10.4 grades, with a standard deviation of 3.9 grades. We also control
for a rich set of demographic characteristics. Behrman et al. (2010) provide further detailed
summary statistics.
III. Empirical Findings
We first use an ordinary least squares (OLS) to investigate the relationship between
financial literacy and wealth accumulation. Consistent with previous reports, we find that
financial literacy is positively and significantly associated with total net wealth and each of its
components. Controlling for the effect of schooling reduces the magnitude of the effect of
financial literacy by almost half, suggesting that financial literacy does proxy in part for
To address concerns of bias created by omitted variables or measurement error
in the
OLS coefficients, we also instrument for financial literacy and schooling using a set of candidate
variables that should predict financial literacy and schooling well but are likely not to affect
wealth directly or indirectly through other unobserved factors. For example, we posit that
respondents’ exposure to national schooling voucher policy changes or pension fund marketing
efforts likely affects their level of schooling and financial literacy, but do not have any direct
effects on wealth accumulation decisions. We consider three broad sets of candidate instruments:
Age-dependent variables, Family Background factors, and Respondent Personality traits.
Despite plausible arguments, we acknowledge that any of these variables could still affect wealth
, and we use the Hansen’s J test of over-identifying restrictions to determine which
instruments appear truly independent of the second-stage disturbance term. We conclude that the
Hansen J statistic does have power in identifying problematic candidate instruments and use only
the variables that survive tests for both instrument strength and exogeneity.
The empirical analysis provides estimated impacts of financial literacy and schooling
using the above instrumental variable (IV) strategy. When only the PRIDIT financial literacy
index is included and instrumented, the coefficient estimates are positive, significant, substantial,
Estimates of noise-to-signal ratios for schooling attainment are often about 10 percent,
producing a bias towards zero of almost that magnitude (Behrman, Mark Rosenzweig, and Paul
Taubman 1994).
Detailed descriptions of each of these variables are provided in Behrman et al. (2010).
For example, family background variables such as maternal schooling could also proxy for
factors such as intergenerationally correlated ability endowments that directly affect wealth
(Behrman and Rosenzweig 2002).
and twice to three times larger than comparable OLS estimates. When only schooling is included
and instrumented, the coefficient estimates are positive, significant, substantial, and from 16-84
percent larger than the comparable OLS estimates. Including both instrumented schooling and
the PRIDIT financial literacy variables, the schooling effects mostly become statistically
insignificant and negative, whereas the financial literacy effects are positive, significant, and
substantial, and larger than comparable OLS estimates.
This pattern suggests that OLS estimates greatly understate the effect of financial literacy
on wealth accumulation. The IV estimates imply that a 0.2 standard deviation increase in the
PRIDIT financial literacy score would, on average, raise net wealth by $13,800, broken down
into about a $5,200 boost in pension wealth, a $1,600 rise in net housing wealth, and a gain of
$6,900 in other wealth. The same 0.2 standard deviation increase in the PRIDIT financial literacy
score would also boost the density of pension contributions by on average of three percent and
the probability of calculating retirement monetary needs by an average of 0.5 percent.
Next we add a financial literacy-schooling interaction term to the linear model; results
show that the interaction term is positive for all wealth components and substantially more
precisely estimated than the linear financial literacy and schooling terms. These findings suggest
a specification that includes only the interaction between financial literacy and schooling. In all
cases, the estimated effects for financial literacy-schooling interactions are positive and
substantial for wealth and actually somewhat bigger than in the linear model for pension and
housing wealth.
Finally, our PRIDIT measure of financial literacy allows us to assess the marginal
impacts of correct responses of the individual questions on each of the wealth outcomes. We
simulate the impact for the “core” and “sophisticated” HRS questions, and find that knowing the
correct answers to the HRS ”core” questions has a nearly 1.5 times greater impact than knowing
the correct answers to the sophisticated questions.
III. Discussion
Our findings imply, first, that using OLS to estimate the effects of financial literacy and
schooling will likely be misleading due to measurement error and unobserved factors. IV
estimates indicate that financial literacy is more important than schooling for explaining
variation in household wealth and pension contributions. Second, our improved estimates of
financial literacy impacts are substantial and potentially quite important; indeed they are large
enough to imply that investments in financial literacy could well have high payoffs. Third, we
show that some components of financial literacy, such as the HRS “core” questions, are
particularly important. This insight was not available from prior representations of financial
literacy. Fourth, we contribute to a growing body of research on the factors influencing peoples’
links with financial markets. Households that build up more net wealth, particularly via the
pension system, may be better able to smooth consumption in retirement and thus enhance risk-
sharing and wellbeing in old age. Our finding that financial literacy enhances peoples’ likelihood
of contributing to their pension saving suggests that this is a valuable pathway by which
improved financial literacy can build household net wealth.
In future work we hope to evaluate in more detail the costs as well as the benefits of
enhancing financial literacy levels. Meanwhile, we view as very important the central finding of
Detailed marginal effects for each question are available in Behrman et al. (2010).
Hastings, Mitchell, and Eric S. Chyn (2010) show that financial literacy can also affect
retirement saving through other channels such as the choice of investment fund or pension
this paper: that by investing in financial literacy, individuals, firms, and governments can
enhance household wealth and wellbeing. As Federal Reserve Board Chairman Ben Bernanke
(2010) stated in a recent speech to the National Bankers’ Association, “[H]elping people better
understand how to borrow and save wisely and how to build personal wealth is one of the best
things we can do to improve the well-being of families and communities.”
Behrman, Jere R. and Mark R. Rosenzweig. 2002. “Does Increasing Women’s Schooling Raise
the Schooling of the Next Generation?” American Economic Review, 92(1): 323-334.
Behrman, Jere R., Mark R. Rosenzweig, and Paul Taubman. 1994. “Endowments and the
Allocation of Schooling in the Family and in the Marriage Market: The Twins Experiment.”
Journal of Political Economy, 102(6): 1131-1174.
Behrman, Jere, Olivia S. Mitchell, Cindy K. Soo, and David Bravo. 2010. “Financial Literacy,
Schooling, and Wealth Accumulation.” NBER Working Paper 16452.
Bernheim, Douglas, Jonathan Skinner, and Steven Weinberg. 2001. “What Accounts for the
Variation in Retirement Wealth among U.S. Households?” American Economic Review, 91(4):
Bernanke, Ben. 2010. “Fostering Financial Literacy.” Presentation for the National Bankers’
Association Foundation Financial Literacy Summit. http:/ / www.federalreserve.gov
Bravo, David, Jere R. Behrman, Olivia S. Mitchell, and Petra Todd. 2006. Encuesta de
Protección Social 2004: Presentación General y Principales Resultados. Centro de Microdatos.
Brockett, Patrick, Richard A. Derrig, Linda L. Golden, Arnold Levine, Mark Alpert. 2002.
“Fraud Classification Using Principal Component Analysis of RIDITs.” Journal of Risk and
Insurance, 69: 341-371.
Hastings, Justine and Olivia S. Mitchell. 2011. "How Financial Literacy and Impatience Shape
Retirement Wealth and Investment Behaviors.” NBER Working Paper 16740.
Hastings, Justine, Olivia S. Mitchell, and Eric Chyn. 2011. “Fees, Framing, and Financial
Literacy in the Choice of Pension Managers.” In Financial Literacy: Implications for Retirement
Security and the Financial Marketplace. Eds. Olivia S. Mitchell and Annamaria Lusardi. Oxford:
Oxford University Press: 101-115.
Lusardi, Annamaria, Olivia S. Mitchell, and Vilsa Curto. 2010. “Financial Literacy among the
Young: Evidence and Implications for Consumer Policy.” Journal of Consumer Affairs, 44(2):
Lusardi, Annamaria and Olivia S. Mitchell. 2008. “Planning and Financial Literacy: How Do
Women Fare?” American Economic Review P&P, 98(2): 413-417.
Lusardi, Annamaria and Olivia S. Mitchell. 2007a. “Baby Boomer Retirement Security: The
Roles of Planning, Financial Literacy, and Housing Wealth.” Journal of Monetary Economics,
54(1): 205-224.
Lusardi, Annamaria and Olivia S. Mitchell. 2007b. “Financial Literacy and Retirement Planning:
New Evidence from the RAND American Life Panel.” Pension Research Council WP 2007-03.
Lusardi, Annamaria and Olivia S. Mitchell. 2007c. “Financial Literacy and Retirement
Preparedness: Evidence and Implications for Financial Education.” Business Economics, 42(1),
... Financially literate individuals are more likely to engage in healthy financial behaviors and achieve better financial outcomes (Stolper and Walter, 2017). Empirical evidence shows, for instance, that the level of financial literacy determines the outcome of the wealth accumulation process (Behrman et al., 2012;Hastings and Mitchell, 2020;Letkiewicz and Fox, 2014;van Rooij et al., 2012). van Rooij et al. (2012) indicated two channels through which financial literacy fosters wealth accumulation: (1) an increased likelihood to invest in the stock market, which allows financially savvy individuals to take advantage of the equity premium and (2) a higher propensity to enact retirement planning among financially literate consumers. ...
... Some of the items comprising the financial literacy instrument applied in SHARE were used in numerous previous studies. For instance, slightly modified questions about a disease and about a savings account (Q1 and Q4) were applied by Behrman et al. (2012) as a part of their 12-item financial literacy test. They found that these questions were particularly "informative" regarding the underlying financial literacy construct. ...
... They showed that knowing the correct responses to three "core" financial literacy questions (including our questions Q1 and Q4) had almost 1.5 times greater impact on the wealth accumulation outcomes compared to responding correctly to the questions comprising the so-called Big Three "sophisticated" financial literacy quiz. The same questions as in Behrman et al. (2012) were used by Schmeiser and Seligman (2013), who referred to this instrument as financial literacy measure. They were also adopted as financial literacy proxies in studies based on the US Panel Study of Income Dynamics , in the English Longitudinal Study on Ageing (Banks and Oldfield, 2007), as well as in the third wave of the Irish Longitudinal Study on Ageing (Irish Longitudinal Study of Ageing, 2015). ...
Purpose Preserving sufficient financial assets is crucial for maintaining the standard of living. The lack of adequate financial cushion can translate into financial hardship at any age, but its effects can be especially severe in later adulthood. The authors evaluate whether financial literacy can prevent individuals from depleting the stock of liquid financial assets below a predefined minimum level. Design/methodology/approach Defining financial resilience as the ability to maintain the value of household savings above the level of 3-monthly incomes, the authors examined whether financial literacy is (1) prospectively associated with the probability of losing financial resilience and (2) the probability of gaining financial resilience among financially vulnerable middle-aged and older adults. To this end, the authors applied the multivariate Cox proportional hazards model with time-varying covariates. Data were retrieved from the Survey of Health, Aging and Retirement in Europe with the sample comprising 13,718 adults aged ≥ 50 years in (1) and 12,802 in (2). Findings The authors show that financial literacy plays a protective role for financial resilience. Its role is not symmetrical and protects more against the loss of financial resilience than it contributes to the gain of financial resilience. Among individuals aged 65–74, the association between financial literacy and financial resilience is weaker than among adults in the middle-age (50–64) and among the oldest (75+). Social implications Fostering financial literacy can be important to help middle-aged and older adults maintain a good quality of life and favorable living standards. Originality/value Given the scarce evidence on the links between financial literacy and financial resilience among middle-aged and older adults, the article contributes to the literature by examining whether financial literacy retains its protective role in later stages of the life course.
... Along similar lines, Mondragon-Valez (2009) confirmed that wealth is not independent of education, but often a result thereof. This is emphasized in Behrman, Mitchell, Soo and Bravo (2012) who found that financial literacy was positively associated with total net worth and each of its components, further stating that financial knowledge was more important than general schooling when considering wealth creation. Bannier and Schwartz (2018) found that men's wealth increases with their confidence, whilst for women there is no such effect, despite both genders showing a positive effect of financial literacy on wealth. ...
Full-text available
Gender inequality continues as a broad issue, despite many studies and pursuant actions in an organizational context. Highly concerning, and the focus of this chapter, is the actual wealth creation inequality, exemplified by the lack of women on the top end of the wealth curve. The impact of financial literacy and self-efficacy is investigated through a research survey to support understanding of the influence of this financial self-efficacy on women's wealth creation versus men. The evidence gathered disputed the thinking by showing that although there is no significant difference in financial self-efficacy, there continues to exist a significant wealth difference favouring males. It did present future research potential towards understanding then the adjacent factors, such as motivation, that could explain the lack of wealth creation, where financial literacy and self-efficacy are equal to men.
... In regard to bill-paying, evidence indicates that Asian Americans have a higher level of "financial literacy" than many other groups (Lusardi, 2011;Lusardi & Mitchell, 2011: p. 504). Knowledge of finances has a positive effect on wealth accumulation (Behrman et al., 2012;Lusardi, 2015). Conversely, costly financial practices such as being unbanked, using pawn shops, or taking out high-interest loans (e.g., "payday" loans and auto-title loans), can create a vicious cycle whereby higher-cost borrowing reduces savings or "rainy day" funds which increases the need to engage in further borrowing (Lusardi, 2011). ...
Full-text available
Racial and ethnic inequality continues to be the subject of considerable public interest. We shed light on this issue by examining racial disparities in the prevalence of several types of hardship, such as trouble paying bills and housing problems, in the USA over the 1992–2019 period. Using data from several panels of the Survey of Income and Program Participation, we find that hardships were considerably higher—sometimes double, depending on the measure—among blacks and Hispanics than whites and Asians. Nevertheless, these disparities generally narrowed over time. We find that the decline in these disparities—as indicated by a summary hardship index—exceeded that of the official income poverty ratio. We also find that while Asians were more likely to be poor than whites, they were not more likely to experience hardship. Notably, we also see variation in the experiences of different types of hardship. Specifically, there was little decline in the racial disparity of two of the hardships that tend to be responsive to short-term fluctuations in income—bill-paying and health hardship, as well as fear of crime—but substantial declines in disparities with most other measures. Overall, our findings indicate significant racial differences in the experience of hardship, though with a narrowing of many gaps over time.
... Simultaneously, households with higher financial literacy analyze information and evaluate financial products in boosting social trust and risktaking abilities, as well as household willingness to purchase financial insurance (Kwon and Ban, 2021), and when these safeguards are obtained, they assist households in diversify risks and decrease the probability of future poverty. (3) According to Behrman's theoretical analysis of educational returns, financial literacy can influence the "Learning by doing" process of household participation in financial markets (Behrman et al., 2012;Lusardi et al., 2017), assisting households in understanding . ...
Full-text available
Financial literacy is the significant human capital factor affecting people's ability to obtain financial services. Evaluating the relationship between financial literacy and relative poverty is of great significance to poverty reduction. This study investigated the impacts of financial literacy on relative poverty from the perspective of poverty psychology and market participation using data from the 2017, 2019 China Household Finance Survey (CHFS). The empirical findings showed that financial literacy can alleviate relative household poverty through household participation in entrepreneurial activities, commercial insurance participation and the choice of lending channels. Financial literacy has significant poverty reduction effect on households of continuous operation, reduces the likelihood of exiting operation. Further discussion showed that the poverty reduction effect of financial literacy is more pronounced among households with higher levels of financial literacy, under the age of sixty, low levels of indebtedness and in the eastern region. Our study provides empirical evidence for encouraging market participation and promoting financial literacy and provide valuable recommendations for the policymaker to improve poverty reduction effect in the developing country context.
The purpose of this paper is to explore the impact of financial literacy on financial well-being among the business school faculties. Both the variables (financial literacy and financial well-being) are operationalized as multi-dimensional constructs to undertake the study. Moreover, the paper also endeavored to examine the mediating role of financial self-efficacy between financial literacy and financial well-being. The paper adopts a survey by questionnaire method to gather data from 203 business school faculty members through the simple random sampling (SRS) technique. Confirmatory factor analysis was used for scale validation, and structural equation modeling was used for hypotheses testing. Mediation was tested using percentile bootstrap with a 95% confidence interval. The study found a significantly positive impact of financial literacy as well as its dimensions on financial self-efficacy and financial well-being. It was also found that financial self-efficacy partially mediates the effect of financial literacy on financial well-being. Measurement of the constructs was done on subjective measures, and the study is limited to business school faculties only. The present research findings could be employed in crafting educational programs for business schools. These programs shall guide such institutions in imparting the knowledge and skills among students regarding their personal finances in terms of savings and retirement planning. The study was focused on the business school faculties of the Jammu and Kashmir region, who are less exposed to the financial literacy programs due to factors like frequent lockdown and internet shutdowns. Moreover, it is generally witnessed that salaried class people in Jammu and Kashmir pay less attention to long-term financial planning for retirement, which makes the present study more relevant. Therefore, this study will prove beneficial to all the employees, especially the business school faculties, to understand the importance of financial literacy and its subsequent effect on financial well-being.
Full-text available
Building on theory and research in financial capability, this study enhances a financial capability model by integrating psychological self-sufficiency (PSS) theory as part of the financial literacy component. Using PSS, a concept from workforce development literature, this study investigates the extent to which an empowerment-based PSS process in targeting financial goals is associated with financial literacy. Path analyses were conducted using a sample of 187 low-income individuals from a large social service agency in Chicago. Findings suggest that perceived financial barriers and financial hope—the two targets of PSS interventions—are associated with financial attitude and behavior, controlling for other demographic variables. These findings can guide policy makers and service providers to build in PSS process-based financial literacy components in vocational and adult education and training as a more human-centered approach to workforce development.
The financial system is a highly competitive field whose applications range from as big as the strategic vision and missions of the multinational companies to as small as day-to-day household expenditure decisions or management of pocket money by students. Financial literacy is a life skill that, in theory, is highly related to the well-being of individuals and companies. In the subject of financial literacy, there is a large body of literature, but very little to no knowledge on the trend and patterns of the literature and research advances in the body of knowledge. With the help of Scientific mapping analysis (SMA) and Bibliometric analyses, this study aims to declutter the literature in the field and find the future research direction in financial literacy. The study is carried out on 1000 documents from a 20-year time horizon (2001–2021), indexed on Web of Science. The study shows the publication trends, most relevant authors, journals, countries. The most significant, developing, and trending themes in the subject and the intellectual structure were investigated using keyword analysis. To better understand the social structure in financial literacy and well-being, co-authorship analysis was used.
Full-text available
Financial literacy is a determinant of individual wealth accumulation and social well-being. In this study, we examine the relationship between financial literacy and crime incidence using financial literacy data and crime data in the U.S. from 2009 to 2018. We posit that citizens’ financial literacy is negatively associated with the crime rate because financially literate citizens are better at managing their wealth and improving their economic condition. They are less likely to have unfulfilled basic needs, and thus are less prone to crimes, especially crimes driven by economic need. We find that the financial literacy of citizens is negatively associated with crime rates. Furthermore, examining on a disaggregated basis, financial literacy is negatively associated with violent crimes and property crimes. Our findings reveal the necessity of mandating financial education programs in workplaces and highlighting the role of financial literacy in corporate governance. This study is the first to empirically address the criminological consequences of low financial literacy and underline the way to improve social security by increasing people’s financial condition
Recent pension reforms have shifted a larger responsibility towards savers. Individuals therefore need better knowledge of the rules and incentives embedded in the pension system to adequately save and prepare for retirement. In this paper, we use a novel Swedish survey matched with high-quality administrative data to show that many lack, and feel that they lack, such pension-specific knowledge. We also show that the most economically vulnerable groups know the least. Linking pension knowledge to behavior, we find that knowing less is associated with lower preparedness for retirement, even after controlling for financial literacy and subjective knowledge. Moreover, a large majority state the complexity of the pension system, or that they have planned to learn more about pensions but that it just hasn’t happened, as reasons for why they do not have sufficient knowledge.
Full-text available
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.
We examined financial literacy among the young using data from the 1997 National Longitudinal Survey of Youth. We showed that financial literacy is low among the young; fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification. Financial literacy is strongly related to sociodemographic characteristics and family financial sophistication. Specifically, a college-educated male whose parents had stocks and retirement savings is about 50 percentage points more likely to know about risk diversification than a female with less than a high school education whose parents were not wealthy. These findings have implications for consumer policy.
Even among households with similar socioeconomic characteristics,sm,ling and wealth vary, considerably. Life-cycle models attribute this variation to differences ill time preference rates, risk tolerance, exposure to uncertainty, relative tastes for work and leisure at advanced ages, and income replacement rates. These factors have testable implications concerning the relation between accumulated wealth and the shape of the consumption profile. Using the Panel Study of Income Dynamics and the Consumer Expenditure Sun,ey, we find little support for these implications. The data are instead consistent with "rule of thumb," "mental accounting, " or hyperbolic discounting theories of wealth accumulation.
A growing literature shows how consumers make mistakes in a variety of different settings pertinent to financial decision-making. Using data from a randomized experiment in Chile, we show how different ways of presenting pension management fees shape consumer choices, and how responses to pension fee information varies by level of financial literacy. Our results indicate that, in choosing pension funds, those with lower levels of education, income, and financial literacy rely more on employers, friends, and coworkers, than on fundamentals. We also find that such individuals are more responsive to information framing when interpreting the relative benefits of different investment choices.
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.
This article introduces to the statistical and insurance literature a mathematical technique for an a priori classification of objects when no training sample exists for which the exact correct group membership is known. The article also provides an example of the empirical application of the methodology to fraud detection for bodily injury claims in automobile insurance. With this technique, principal component analysis of RIDIT scores (PRIDIT), an insurance fraud detector can reduce uncertainty and increase the chances of targeting the appropriate claims so that an organization will be more likely to allocate investigative resources efficiently to uncover insurance fraud. In addition, other (exogenous) empirical models can be validated relative to the PRIDIT-derived weights for optimal ranking of fraud/nonfraud claims and/or profiling. The technique at once gives measures of the individual fraud indicator variables’ worth and a measure of individual claim file suspicion level for the entire claim file that can be used to cogently direct further fraud investigation resources. Moreover, the technique does so at a lower cost than utilizing human insurance investigators, or insurance adjusters, but with similar outcomes. More generally, this technique is applicable to other commonly encountered managerial settings in which a large number of assignment decisions are made subjectively based on ‘‘clues,‘’ which may change dramatically over time. This article explores the application of these techniques to injury insurance claims for automobile bodily injury in detail.
We compare wealth holdings across two cohorts of the Health and Retirement Study: the early Baby Boomers in 2004, and individuals in the same age group in 1992. Levels and patterns of total net worth have changed relatively little over time, though Boomers rely more on housing equity than their predecessors. Most important, planners in both cohorts arrive close to retirement with much higher wealth levels and display higher financial literacy than non-planners. Instrumental variables estimates show that planning behavior can explain the differences in savings and why some people arrive close to retirement with very little or no wealth.
Two competing explanations for why consumers have trouble with financial decisions are gaining momentum. One is that people are financially illiterate since they lack understanding of simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. A second is that impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs. We use experimental evidence from Chile to explore how these factors appear related to poor financial decisions. Our results show that our measure of impatience is a strong predictor of wealth and investment in health. Financial literacy is also correlated with wealth though it appears to be a weaker predictor of sensitivity to framing in investment decisions. Policymakers interested in enhancing retirement well-being would do well to consider the importance of these factors.
Financial literacy and schooling attainment have been linked to household wealth accumulation. Yet prior findings may be biased due to noisy measures of financial literacy and schooling, as well as unobserved factors such as ability, intelligence, and motivation that could enhance financial literacy and schooling but also directly affect wealth accumulation. Here we use a new household dataset and an instrumental variables approach to isolate the causal effects of financial literacy and schooling on wealth accumulation. While financial literacy and schooling attainment are both strongly positively associated with wealth outcomes in linear regression models, our approach reveals even stronger and larger effects of financial literacy on wealth. It also indicates no significant positive effects of schooling attainment conditional on financial literacy in a linear specification, but positive effects when interacted with financial literacy. Estimated impacts are substantial enough to suggest that investments in financial literacy could have large positive payoffs.