Using the Right Yardstick: Assessing Financial Literacy Measures by Way of Financial Well-Being

Authors

  • MAXIMILIAN D. SCHMEISER,

  • JASON S. SELIGMAN


  • Maximilian D. Schmeiser (max.schmeiser@frb.gov) is an economist at the Federal Reserve Board. Jason S. Seligman (seligman.10@osu.edu) is an assistant professor at John Glenn School of Public Affairs, The Ohio State University. The research reported herein was performed pursuant to a grant from the US Social Security Administration (SSA) funded as part of the Financial Literacy Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA, any agency of the federal government, the Federal Reserve, or the Center for Financial Security at the University of Wisconsin-Madison. The authors wish to thank Matthew Gross, Sudipto Banjeree, and Dee Warmath for research assistance, and are grateful for feedback from discussants and participants at the summer CFS FLRC workshop in Madison, WI.

Abstract

Despite the proliferation of academic studies examining financial literacy and financial outcomes, no consistent definition or empirically validated measures of financial literacy exist. While a handful of questions have become the standard measures of financial literacy in previous research, little work has been done examining whether responses to these questions accurately capture underlying financial capability, or whether they causally relate to subsequent financial well-being. Taking advantage of longitudinal data from the Health and Retirement Study we examine whether some of the questions previously used as measures of financial literacy are consistent measures of financial knowledge and effective predictors of future changes in wealth. We find that respondents frequently do not consistently answer questions across survey waves and that the context in which a question is asked affects the likelihood of correctly responding. Moreover, our regression analyses suggest that correctly answering these questions, consistently or not, has little significant relationship to changes in wealth over time, and is often related to a decrease in future wealth. Our findings should give pause to researchers using the financial literacy questions examined here, particularly from cross-sectional data.

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