The Assessment of Financial Literacy: New Evidence from Europe

Abstract

The hypothesis that people with more financial literacy make better financial decisions and show positive financial behaviors is crucial for more than one stakeholder. A weak connection between financial literacy and financial behaviors jeopardizes the opportunity to invest in financial education and to develop a consumer protection framework based on the chance to develop aware and responsible financial consumers. This study uses data from different countries (Germany, France, Italy, Sweden, the UK), using surveys devised and fielded specifically to measure financial literacy and in order to assess if the availability of a broad set of items on financial literacy allows to develop new measures of financial literacy to better understand the relationship between financial literacy and financial behaviors. The well-established Lusardi–Mitchell questions are compared with measures that differ in terms of number of items (the “50-items” index), range of topics (the “5-specific” index), or selection process of the items (the “unbiased” index). Results support the hypothesis that the Lusardi–Mitchell questions remain a good measure in a first-step analysis, but a deeper understanding of the connection between financial literacy and financial behaviors benefits from the measures proposed in the study, that should be considered as additional assessment tools in financial literacy research.

Do Financial Literacy and Financial Education Influence Smoking Behavior in the United States?

“…We measured financial literacy using Lusardi and Mitchell’s [ 63 ] methodology, which is simple and widely adopted in the existing literature (e.g., [ 48 , 53 , 64 , 65 , 66 , 67 , 68 , 69 , 70 , 71 ]). Moreover, Nicolini and Haupt [ 72 ] found that the Lusardi–Mitchell measurement of financial literacy performs well unless financial literacy is used to explain financial behavior. The three questions which we used to measure financial literacy are as follows:…”

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

“…A further two others concerned borrowing (Mortgages, Loans) and the remaining four concerned saving and investment: Investment diversification, Bonds, Stock Investment and Pensions. The 10 topics, all relevant to the financial well‐being of citizens across contemporary market economies, were identified from a literature review (Nicolini, 2019), building on the five questions devised by Lusardi (2011). To ensure that individual items are similarly relevant, questions concerning specific national financial matters and specific financial products were excluded.…”

“…Our initial pool of 50 items sampling 10 topics was selected with an international population in mind (see Appendix A, and Nicolini, 2019). Our starting point was the “big five” items devised by Lusardi (2011) and her colleagues (Lusardi and Mitchell, 2011a; 2011b; 2014).…”

“…Turning to the evaluation of the scales, our approach was to first assess their basic scale properties in terms of the IRT criteria explained in the next section. We then examined their construct validity by regressing demographic variables on each scale, since previous research has found that financial literacy varies with age, gender, level of education and income (Lusardi and Mitchell, 2011b; Nicolini, 2019). Finally, we compared how well various scales predicted survey responses to certain questions related to financial well‐being.…”

“…2 2 Initially this topic was labeled “Insurance and retirement” (Nicolini, 2019). However, we excluded the one insurance item, leaving four concerning pension knowledge. …”