Financial Knowledge and Financial Literacy at the Household Level

Abstract

This paper uses data from the Health and Retirement Study to explore the mechanism that underlies the robust relation found in the literature between cognitive ability, and in particular numeracy, and wealth, income constant. We have a number of findings. First, the more valuable the pension, the more knowledgeable are covered workers about their pensions. We suggest that causality is more likely to run from pension wealth to pension knowledge, rather than the other way around. Second, most measures of cognitive ability, including numeracy, are not significant determinants of pension and Social Security knowledge. Third, standardizing for incomes and other factors, a pension of higher value does not substitute for other forms of wealth. Rather, counting pensions in total wealth, those with more valuable pensions save more for retirement, other things the same. Fourth, there is no evidence that wealth held outside of pensions is influenced by knowledge of pensions.In sum, numeracy does not influence wealth in whole or in part by affecting financial knowledge of one's pension plan, where financial knowledge of the pension then influences other decisions about retirement saving.These findings raise questions about the mechanism that underlies the relation between cognition, especially numeracy, and wealth. From a policy perspective, they suggest that the numeracy-wealth relation should not be taken as evidence that increasing financial literacy will increase the wealth of households as they enter into retirement.

Childhood roots of financial literacy

“…Earlier studies have shown that financial literacy has a positive effect on long-term savings and retirement planning (Lusardi andMitchell, 2007, Clark et al, 2012), stock market participation (van Rooij et al, 2011a), portfolio diversification (Guiso and Jappelli, 2008), wealth (Gustman et al, 2012, van Rooij et al 2012, Jappelli and Padula, 2013, and informed use of debt (Lusardi andTufano, 2009, Stango andZinman, 2009). Results in Section 5 and 6…”

Financial literacy and financial behavior: Evidence from the emerging Asian middle class

“…By doing this, we try to expand the measure of financial literacy to include institutional knowledge, which has been shown to be of importance for financial outcomes (Gustman et al, 2012, Carpena et al, 2011. There are about ten foreign banks operating in the retail market in Bangkok, but they are far less widespread than familiar local banks.…”

Skilled But Unaware of It: Occurrence and Potential Long-Term Effects of Females' Financial Underconfidence

“…A number of studies have examined the impact of financial knowledge on wealth and, generally, find a positive association (Lusardi, 2004;Behrman et al, 2012;Gustman et al, 2012;Van Rooij et al, 2012). The corresponding negative effect of a lack of financial knowledge has been attributed to financial mistakes such as paying too high fees or interest on credit card debt and home equity loans (Agarwal et al, 2009), not participating in financial markets (Van Rooij et al, 2011), or holding undiversified portfolios (Calvet et al, 2007;Von Gaudecker, 2015).…”

“…Using a fairly standardized set of multiple-choice questions to measure financial literacy, various studies indicate that a large fraction of the population indeed lacks basic financial knowledge and that this severely hampers their financial engagement (Bernheim et al, 2001;Bernheim and Garrett, 2003;Lusardi and Mitchell, 2007;Lusardi and Mitchell, 2011). In this respect, financial (il)literacy has been linked to retirement planning (Lusardi and Mitchell, 2007;Lusardi and Mitchell, 2008;Van Rooij et al, 2012), stock market participation (Van Rooij et al 2011;Balloch et al 2015), wealth accumulation (Behrman et al, 2012;Gustman et al, 2012), debt accumulation (Lusardi and Tufano, 2015), and risk (Lusardi, 2015).…”