Understanding the Financial Knowledge Gap: A New Dimension of Inequality in Later Life

Abstract

To understand the relationship between financial knowledge and financial behaviors, it is important to understand the financial knowledge gap -the distance between objectively and subjectively measured financial knowledge. Overestimating one's financial knowledge can lead to risky financial behaviors and economic vulnerability. To date, limited empirical work has examined how the gap between one's perception of their own financial knowledge and their actual knowledge varies across the life course. We analyze the size and nature of the financial knowledge gap and its variation across the life course. We use nationally representative data from the Canadian Financial Capability Survey (CFCS) and find robust evidence that older adults overestimate their financial knowledge. Social workers can assess the financial knowledge gap and inform and educate their clients to protect from financial fraud, exploitation, and, abuse.Furthermore, social workers can offer informational seminars, workshops, and financial planning and counseling sessions.

Financial literacy and its variables: The evidence from Indonesia

“…Previous studies have revealed that subjective financial knowledge has a positive relationship with financial well-being (Riitsalu and Murakas, 2019;Woodyard, 2013); financial behavior (Allgood and Walstad, 2013;Deenanath et al, 2019;Hilgert et al, 2003;Robb and Woodyard, 2011;Sivaramakrishnan et al, 2017;Seay and Robb, 2013;Tang and Baker, 2016;Xiao et al, 2014); and financial decisions (Khan et al, 2017). Even though previous studies have indicated that both objective and subjective financial knowledge are important to financial behavior to which they contribute different roles, several studies have revealed that subjective financial knowledge is more adequate for explaining financial decisions and behaviors than objective financial knowledge (Robb and Woodyard, 2011).…”

“…Financial literacy is described using various concepts that continue to be studied and developed over time. Previous studies have conceptualized financial literacy using multivariables (Atkinson and Messy, 2012;Huston, 2010;Hung et al, 2009;Khan et al, 2017;Lusardi and Mitchell, 2013;Xiao et al, 2014;Priyadharshini, 2017;Dewi et al, 2020). In recent years, the conceptualization of financial literacy has increasingly evolved along with the development of dynamic financial issues.…”

“…To measure the level of financial knowledge, subjective financial knowledge or perceived knowledge and objective financial knowledge have been used. Subjective financial knowledge is how people perceive themselves in terms of what they know and how they would assess their level of financial knowledge (Allgood and Walstad, 2013;Babiarz and Robb, 2014;Khan et al, 2017;Mishra and Kumar, 2011). Objective financial knowledge is what is actually stored in memory and is measured by assessing people's levels of understanding of various components of financial markets and products, such as numeracy, assets, debts, savings and investments, value of money, inflation, compounding interest, and risk diversification (Lusardi et al, 2010;Lusardi and Mitchell, 2014).…”

“…Hung et al (2009) suggested in their conceptual model of financial literacy that financial behavior depends on three variables: actual knowledge, perceived knowledge, and financial skills. Furthermore, Khan et al (2017); Lusardi and Mitchell (2013); and Xiao et al (2014) revealed that financial skills, financial knowledge, and financial attitude affect financial behavior. Atkinson and Messy (2012) strengthened the results of previous studies, extending this model by adding financial well-being which is affected by knowledge, skills, and attitude through to financial behavior.…”

“…Other models of financial literacy are conceptualized into three dimensions, namely, financial knowledge, financial attitude, and financial behavior (Atkinson and Messy, 2011). The concept of financial literacy through knowledge, skills, attitude, and financial behavior is also supported by (Atkinson & Messy, 2012;Lusardi & Mitchell, 2013;Xiao et al, 2014;Khan et al, 2017). Priyadharshini (2017) provided evidence that financial literacy and its variables, such as financial attitudes and behavior, financial skills, financial knowledge, financial capability, financial awareness, financial goals, and financial decisions, are interlinked and interdependent.…”