The Effects of Perceived and Actual Financial Literacy on Financial Behaviors

Abstract

A combined measure of financial literacy that includes both a test score of actual financial literacy and a self-rating of overall financial literacy is used in this study. We find that the combined measure appears to provide greater understanding about how financial literacy affects financial behaviors. A large national survey of U.S. adults and households (n = 28,146) was used to investigate how this overall financial literacy is likely to change financial behaviors across five financial topics: credit cards, investments, loans, insurance, and financial advice. For each topic, we include 4-5 financial behaviors (22 in total) to demonstrate the consistency of the findings within and across topics. Although we are unable to identify a causal relationship, the results from the probit analysis show that both actual and perceived financial literacy appear to influence financial behaviors and that perceived financial literacy may be as important as actual financial literacy. (JEL D14, G00)

Financial literacy, financial advice, and financial behavior

“…Agnew and Szykman (2005), for instance, document a median correlation of 0.49 between actual and self-assessed financial literacy scores, a finding which is qualitatively corroborated in Lusardi and Mitchell (2009) and Parker et al (2012). Moreover, both types of measures have been shown to be individually associated with financial decisions (e.g., Hastings et al 2013;Asaad 2015;Allgood and Walstad 2016). Specifically, Parker et al (2012) show that both self-reported and test-based financial literacy are predictive for retirement planning and savings.…”

“…Moreover, the authors observe a gender gap in that this difference in risk taking based on individuals' own perception of their financial abilities is more pronounced for women. In a recent study, Allgood and Walstad (2016) use a combined measure of test-based and self-assessed financial literacy and find that both financial literacy measures appear to independently correlate with financial behavior, leading them to conclude that self-assessed financial literacy may be as important as test-based financial literacy in explaining financial outcomes. Finally, Kramer (2014) and von Gaudecker (2015) compare individuals' test-based financial literacy levels with how financially literate they perceive themselves and suggest a role for overconfidence which reduces individuals' propensity to demand professional financial advice (see Sect.…”

Financial knowledge among Iranian investors

“…Researchers have described this combination of high perceived and low actual knowledge as overconfidence (Allgood & Walstad, 2015;Guiso & Jappelli, 2005;Pikulina, Renneboog, & Tobler, 2017;Xia et al, 2014). Researchers have described this combination of high perceived and low actual knowledge as overconfidence (Allgood & Walstad, 2015;Guiso & Jappelli, 2005;Pikulina, Renneboog, & Tobler, 2017;Xia et al, 2014).…”

“…More recent research (see, e.g., Allgood & Walstad, 2015) also has included a measure of subjective financial literacy, specifically the respondent's perception of his or her own financial knowledge, and compared that with the individual's objective financial literacy score. Some researchers (including Allgood & Walstad) have focused on overconfidence, which occurs when the individual evaluates his or her own knowledge as greater than the objective financial knowledge score.…”

Racial Differences in the Returns to Financial Literacy Education

“…These data are nationally representative, including 500 observations from each state and the District of Columbia. It is often used to compare financial behaviors of different demographics (Allgood and Walstad 2016;Knoll and Houts 2012;Skimmyhorn 2016). The survey has been conducted in years 2009, 2012, and 2015.…”