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3.2.3 Financial Literacy

As the book regards financial decision-making, it is necessary to select individuals who are familiar with basic financial products and concepts, or simply those who are financially literate. Several measures exist to determine ones level of financial lit- eracy,[1] such as the Dutch DNB Household Survey, US Health and Retirement Survey (HRS) (Rooij et al. 2012) and Surveys of Consumers (SoC) (Hilgert et al. 2003). The DNB household survey is composed of basic questions which tests concepts such as the time value of money, compound interest and inflation and advanced literacy questions which are primarily about the risk and return of assets. The HRS tests concepts relating to interest rates, inflation and risk diversification, whilst the SoC asks about investment behaviours and specific questions about various assets (Hilgert et al. 2003). Specifically amongst students, business students ranked higher in terms of financial literacy (Beal and Delpachitra 2003; Wagland and Taylor 2009), although there is conflicting evidence which suggests that science students outper- form business students in some areas, when a test about personal finance knowledge and education is administered (Cull and Whitton 2011). Demographic wise, young adults, women (Lusardi et al. 2010) and low-income groups (Hilgert et al. 2003) are the least financially literate.

Testing financial literacy is a contentious issue as research states that financial

education does not have an effect on American high school students (Mandell 2008), whilst some studies indicate a relationship between financial literacy and favourable financial outcomes (Cole and Shastry 2009; Fox et al. 2005; Lusardi 2003). For an individual to be financially literate, they must demonstrate knowledge and skills required to make choices within the financial markets (Huston 2010).

Given the mixed results concerning financial literacy testing by a questionnaire, the screening of participants beforehand may be more effective. Participants from certain demographics, who possess the requisite levels of financial knowledge for this book, were used, such as University employees (Zhou and Pham 2004), final-year undergraduates and postgraduate students. The financial knowledge required for this experiment is covered in postgraduate financial coursework, and where participants have not undergone such coursework, they have to be currently working in financial institutions, or frequently be exposed to financial theory and practice, such as those who work at the Business faculty of a University.

As a check to reconfirm the participants' level of financial literacy, specific questions from the Surveys of Consumers[2] (University of Michigan 2001), was used. The questions were included in the questionnaire given to participants. These questions reconfirm whether participants have the level of financial literacy required to understand the financial components of the experiment. Participants are deemed to have the required level of financial literacy if they answer at least three of the four questions correctly. Gauging financial literacy can be carried out using a few questions (Lusardi 2008), but it was only conducted after the main portion of the experiment. The mere evaluation of financial products can activate states of pro- motion or prevention (Zhou and Pham 2004), and thus conducting any of the earlier mentioned financial literacy tests prior to the main portion of the experiment may inadvertently prime participants toward certain regulatory foci, affecting the validity of data collected. Due to the contentious nature of testing for financial literacy (Mandell 2008; Willis 2008), the test of financial literacy conducted in this book will only be coded as a control variable for the logit model. Further analysis into this variable will not be conducted, as inaccurate conclusions may be drawn. The section that follows describes the research methodology that was used to conduct this book, along with an outline of the procedure that was conducted.

  • [1] 6Financial literacy is defined as the ability to make informed judgments and to take effective decisions regarding the use and management of money (Noctor et al. 1992)
  • [2] Contained in Appendix
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