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A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 1
A Review of Financial Behavior Research:
Implications for Financial Education
Jing Jian Xiao University of Rhode Island
Michael Collins University of Wisconsin
Matthew Ford Northern Kentucky University
Punam Keller Dartmouth College
Jinhee Kim University of Maryland
Barbara Robles Federal Reserve System
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 2
1. Introduction
1.1 Purpose
The purpose of this paper is to review recent financial behavior research from the last 25
years and earlier that provides helpful information for financial education policies and practices.
Although the history of personal finance research can be traced to the beginning of the 20th
century, since the 1980s financial behavior research has been active by researchers in consumer
science, economics, business, and other fields (Hira, 2009. This multidisciplinary review
includes major contributions from related fields and considers two broad research questions:
• What factors are associated with financial behaviors?
• What are the implications of these research findings for financial education
policies and practices?
1.2 Financial Education, Financial Behavior, and Well-Being
In 2008, a group of financial education researchers met in a research forum organized by
the Financial Literacy and Education Commission and reached a consensus that effective
financial education should emphasize the development of desirable financial behaviors
(Schuchardt et al., 2009). To develop effective action-oriented financial education programs, we
need to better understand how financial behaviors are developed.
The goal of all financial education policies and practices is to help people increase their
financial capabilities so that they are willing and able to engage in desirable financial behaviors
for improving both their financial well-being and overall well-being. By conducting a
comprehensive review of the research literature on financial behavior, we seek to identify key
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 3
determinants of desirable financial behaviors and provide suggestions for improving financial
education policies and practices.
1.3 The Definition of Financial Behavior
Financial behavior is defined as human behavior that is related to money management
(Xiao, 2008). Common financial behaviors include budgeting, spending, borrowing, saving and
investing, and risk managing. Researchers in diverse fields categorize financial behaviors in
various ways for different purposes, such as positive/negative, optimal/suboptimal,
rational/irrational, and risky/non-risky behaviors. Sometimes these definitions are ambiguous
and controversial. For example, risky behavior can be defined as a behavior that may result in
financial loss in the future. While investing in stocks is commonly viewed as a risky behavior, it
may be desirable for some people, such as young adults with long-term payoff horizons and
available investment income, but inappropriate for others, such as retirees and low income
consumers. Other behavior, such as making credit card payments late, is generally regarded as
both risky and undesirable. For convenience of discussion, this paper uses the terms “desirable
behavior” and “undesirable behavior” based on recommendations from personal finance experts.
In this paper, the terms “behavior” and “decision making” are used interchangeably. A behavior
can be viewed as a decision or a series of decisions dependent on contexts, locations, and
circumstances. Evidence indicates that desirable financial behavior contributes to financial well-
being and general well-being (Kim, Garman, & Sorhaindo, 2003; Xiao, Tang, & Shim, 2009).
1.4 A Framework of Behavior Development
In the literature of financial behavior, many theories from diverse fields are used to study
financial behaviors—for example, the theory of planned behavior (Xiao & Wu, 2008). As a
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 4
conceptual framework, the Transtheoretical Model of Behavior Change (TTM) (Prochaska et al.,
1992) is used for organizing the material and developing implications. Employing a TTM
framework is useful because it permits classification of behavioral research along a few general
categories and provides comprehensive guidelines for stage-matched interventions to effectively
help people modify their behaviors to desirable directions (for example, Block & Keller, 1998).
Using the framework of TTM, financial education can be viewed as one of many possible
interventions that have potential to help people develop desirable financial behaviors under
various circumstances and in various contexts (for example, Xiao, O’Neill et al., 2004; Xiao,
Newman et al., 2004).
1.5 Organization of this Paper
This paper is organized as follows: In section 2, we discuss factors contributing to
financial behaviors, such as economic resources and class (section 2.1), demographics (section
2.2 on gender and race/ethnicity, section 2.3 on life-cycle stages, and section 2.4 on family and
peers), education (section 2.5), psychological factors (section 2.6 on cognition, section 2.7 on
emotion, and section 2.8 on psychological bias), and social factors (section 2.9). In section 3, we
present implications for financial education policies and practices based on the research review.
2. Factors Contributing to Financial Behaviors
2.1 Economic Resources and Classes
Individual and household resources. Economic resources affect arrays of financial
behaviors. The dominant life-cycle hypothesis assumes that individuals are perfectly informed
and strive to smooth life-cycle consumption by borrowing and saving (Ando & Modigliani,
1963), which is considered a prescriptive model (Hanna & Chen, 2008). To better describe
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 5
individual consumer behavior, this model is extended in various ways, including the behavior
life-cycle hypothesis that incorporates advances of cognitive psychology (Shefrin & Thaler,
1988). Based on this model, individuals categorize their income in several different mental
accounts and have different propensities to spend from these accounts. This argument has been
supported by several empirical studies. For example, individuals at various income levels have
different propensities to own financial products (Hilgert, Hogarth, & Beverly, 2003) and to save
from different mental accounts (Xiao & Olson, 1993). Their saving motives also differ by
income and wealth, showing a hierarchical pattern (a positive association) (DeVaney, Anong, &
Yang, 2007; Xiao & Noring, 1994). This hierarchical pattern is also shown in terms of household
financial asset shares (Xiao & Anderson, 1997). Financial behaviors of consumers seeking credit
counseling services also display a hierarchical pattern (Xiao, Sorhaindo, & Garman, 2006).
Income level and wealth are generally thought to be related to increased risk taking and
risk tolerance (Cohn et al., 1975; Hallahan et al., 2004; Riley & Chow, 1992) although findings
have occasionally challenged the life-cycle framework (for example, Bernheim, Skinner, &
Weinberg, 2001), especially for Hispanic and African Americans (Fisher & Montalto, 2010).
Family business owners usually have higher than average income and their risk tolerance level is
also higher than those who do not own family businesses (Xiao, Alhabeeb, Hong, & Haynes,
2001).
Low-income individuals and families. Financial behaviors of low-income individuals and
families are different from their higher income counterparts since they face a different set of
financial issues, such as financial service access, asset accumulation, homeownership, credit use,
and health insurance access (Garasky, Nielsen, & Fletcher, 2008). Low-income individuals often
reside in high-density, low-to-moderate income (LMI) communities that often display minority
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 6
and ethnic enclave characteristics or geographical isolation characteristics (such as rural
communities or tribal areas). Access to affordable financial products and services becomes a
function of limited income (for example, lack of auto ownership) along with geographical-spatial
considerations (for example, limited or nonexistent public transportation and geographical
isolation). Such limitations create barriers to conveniently accessing affordable financial services
for LMI individuals and families. Payday lenders and check-cashing outlets tend to concentrate
in high-density LMI communities (Graves, 2003; Immergluck, 2004; Praeger, 2009). In addition,
LMI communities can be characterized as supplier-driven, cash-oriented economies and markets
(Robles, 2007, 2009).
Low-income individuals are more likely to be the unbanked (Berry, 2004; Washington,
2006). The bulk of our research on the unbanked has focused mainly on the recently arrived
immigrant or immigrant legacy LMI individuals and families (Perry, 2008; Turner et al., 2003).
As a result, there is a significant gap in our research knowledge into individuals who are
“unbanked” due to poor credit and increasing dissatisfaction with banking experiences (Robles,
2009). For recent immigrants, acculturation in lieu of assimilation as well as language facility
play important roles in consumer behavior and usage of mainstream financial institutions (Ogden
et al., 2004; Perry, 2008). In addition, new research is exploring the role of the host community
context for recently arrived immigrants assimilating as ‘“communities’” in lieu of the assumed
‘“individual’” assimilation or acculturation experience (Hatton & Leigh, 2009). We know that in
high-density immigrant and immigrant legacy communities, saving behaviors occur outside of
mainstream financial institutions and often in an extended family or communal context (Chang,
2010; Chung-Hevener, 2006; Robles, 2007, 2009). Research indicates that the unbanked often
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 7
seek out businesses that engage in predatory practices and charge excessive fees and prices
(Rhine, Greene, & Toussaint-Comeau, 2006).
Started in the 1990s, the anti-poverty policy moved to help low-income individuals and
households build assets or wealth (Blank, 2002). Lifting welfare eligibility limits on the value of
a vehicle resulted in higher probabilities of low-income individuals and families owning a car
(Sullivan, 2006), which is important because it provides access to employment opportunities
(Garasky, Fletcher, & Jensen, 2006) and affordable financial services that are rarely located in
inner cities or LMI communities (Graves, 2003; Praeger, 2009). Partially under the rubric of
asset building, government intensified efforts to promote low-income homeownership in the
early to mid-2000s prior to the housing crisis (Belsky, Retsinas, & Duda, 2005). However, the
targeting of subprime financial products in LMI communities—and specifically, communities of
color—has exacerbated the wealth divide and created uncertainty surrounding future nuclear
family homeownership opportunities. The continuing high national unemployment rate has
contributed to a return to 1930s-style intergenerational households with adult children moving in
with elder parents in order to protect assets and minimize depletion of savings (PEW Research
Center, 2010; U.S. Census Bureau, 2010). Recent lump-sum tax refund research indicates that
LMI families do display future-oriented financial behaviors and asset building resiliency focused
on children’s educational expenditures and family communal mobility aspirations (Garcia, 2009;
Robles, 2010).
Sherraden (1991) proposed an institutional saving theory that promoted individual
development accounts (IDA) to help low-income consumers save. More than 40 states have
initiated some type of IDA policy (Greenberg & Patel, 2006). Longitudinal research suggests
that IDA participants have significant variations in saving patterns (Han & Sherraden, 2009).
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 8
Research also indicates that experiential knowledge contributes to cognitive ease and familiarity
with financial services and products even for limited income individuals and households
(Tescher et al., 2007).
2.2 Gender and Race/Ethnicity
Gender differences are found in financial perceptions, behaviors, and satisfactions (Hira
& Mugenda, 2000). Gender has also received considerable attention as a demographic variable
related to risk taking. While some exceptions arise, a considerable stream of research suggests
that women are more risk averse than men in financial situations (for example, Bajtelsmit,
Bernasek, & Jianakoplos, 1999; Cohen & Einav, 2007; Grable, et al., 2006; Halek & Eisenhauer,
2001; Hallahan, et al., 2004; Powell & Ansic, 1997). The general tendency for greater risk
aversion among females has been observed as early as childhood (Hargreaves & Davies, 1996;
Kass, 1964). Symptoms of risk aversion have been evident at the collegiate level as well, as
female students generally take fewer quantitative classes and select financially oriented majors
less often than men (Krishnan, Bathala, Bhattacha, & Ritchey, 1999; Pritchard, Potter, &
Saccucci, 2004). Female collegians also display higher levels of intimidation and lower levels of
financial market knowledge than their male counterparts (Chen & Volpe, 2002; Ford & Kent,
2009). Gender differences are found in investment behaviors such as portfolio diversification as
well (Hira & Loibl, 2008).
Gender also has been linked to differences in children’s financial socialization processes.
Female youths are more likely to receive consumer-oriented training from parents (Allen, 2008)
and to describe parents as more approachable in financial conversations (Allen, et al., 2002). In
recently arrived immigrant families, children and youth often serve as interpreters and translators
during consumption transactions in mainstream markets (Robles, 2007). This early transactional
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 9
experience often serves as an introduction to financial services and product knowledge.
Additional research on gender differences regarding emotions and risky behaviors is presented
in section 2.7.
As with gender, financial behaviors differ in racial/ethnic groups. In several review
papers summarizing research on the financial behaviors of African Americans (Bowen, 2008),
Hispanic Americans (Watchravesringkan, 2008; Robles, 2009), and Asian Americans (Yao,
2008), research identified racial/ethnical differences in money attitudes, spending, credit, and
saving behaviors. Recently, consumer culture and marketing messages in the United States have
produced a significant change in Americans’ attitudes towards debt and financial frugality
(Peñaloza & Barnhart, 2010).
Compared to Caucasians, Hispanic Americans have different attitudes about money,
rating lower in quality and retention/time dimensions of a money attitude scale (Medina, Saegert,
& Gresham, 1996). African Americans and Hispanics devote larger shares of their expenditure
bundles to visible goods (clothing, jewelry, and cars) than do comparable whites. These
differences exist among virtually all subpopulations, are relatively constant over time, and are
economically large (Charles, Hurst, & Roussanov, 2009). Compared to non-Hispanic white
households, Hispanic households allocate significantly more of their budget to food at home,
shelter, and apparel and significantly less to food away from home, entertainment, education,
health care, and tobacco (Fan & Zuiker, 1998). An assessment of the disaggregated apparel
category indicates that Hispanics spend more for children’s clothing than any other apparel item.
African American households, compared to Asian, Caucasian, and Hispanic Americans, have
statistically significantly different budget allocation patterns in more than half of the 13
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 10
expenditure categories (Fan & Lewis, 1999). Asian Americans spend more on education (Fan,
1997) and housing (Fontes & Fan, 2006) compared to other racial/ethnical groups.
Hispanic Americans are more likely to hold retail store and gas credit cards than non-
Hispanic whites (Medina & Chau, 1998). Race is a factor in mortgage borrowing behavior
(Iwarere & Williams, 2003) and discriminatory lending practices (Immergluck, 2004). The
subprime lending boom increased the ability of many Americans to get credit to purchase a
house—with significant wealth erosion consequences in LMI communities given the current
foreclosure crisis (Laderman & Reid, 2008). Using an innovative new dataset, researchers have
found that the possibility that subprime lending did serve as a positive supply shock for credit in
locations with higher unemployment rates and minority residents (Haughwout, et al., 2009).
The disparity in wealth in the United States between African Americans and whites has
long been recognized. Such allocation variances could be due to differences in preferences,
education, access to financial markets, historical legislation, segregation policies, or other factors
(Lui, et al., 2006; Straight, 2002). One factor in the disparity is that inheritances raise the rate of
wealth accumulation of whites relative to that of African Americans (Gittleman & Wolff, 2004).
Minority households are less likely to hold stock investments than white households and also are
more sensitive to stock market movements (Hanna & Lindamood, 2008). Hispanics’ financial
portfolios tend to be smaller and grow at a slower rate than those of white families (Plath &
Stevenson, 2005; Stevenson & Plath, 2006). Although African Americans are less likely to own
stocks than whites, once ownership is accounted for, there is no difference in the portfolio
allocation to risky assets (Gutter & Fontes, 2006).
Many racial/ethnical families experience daily economic activities within the context of
multiple characteristics (for example, being low-income and ethno-racial and female) as well as
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 11
multiple identities, such as mother, daughter, sister, consumer, worker, etc. (Kalsem, 2006;
Thornton & White-Means, 2000; Watson, 2006). In formulating financial counseling programs
and education campaigns, our task is to acknowledge this reality, to understand the dynamics of
converging characteristics (gender and race/ethnicity and class) that create particular and unique
circumstances shaping demand-side behaviors in communities with limited supplier-oriented
financial services and product choices (Viramontez Anguiano & Trask, 2009). Moreover, when
addressing ethno-racial and cultural intersections, research studies indicate that acculturation into
mainstream financial behaviors and markets are nonlinear occurrences and do not follow a
particular chronological timeline (Kalsem,2006; Nickols et al., 2009; Peñaloza, 1995; Perry,
2008; Stayman & Deshpande, 1989; Xu et al., 2004).
2.3 Life-Cycle Stages
In addition to class, gender, and race/ethnicity, age differences are shown in financial
attitudes, beliefs, and behaviors (Hira, 1997). Household holding of financial assets differ by
various life-cycle stages (Xiao, 1996). Age also relates to risk tolerance with risky behavior and
risk tolerance generally thought to decrease with age (for example, Hallahan, et al., 2004;
Jianakoplos & Bemasek, 2006; Wood & Zaichkowsky, 2004), although this finding is by no
means universal (for example, Cohen & Einav, 2007; Riley & Chow, 1992). Risk taking also has
been found to generally decrease when individuals move from single to married status (Hallahan
et al., 2004). Some findings, however, suggest married households take more risk (for example,
Grable, 2000; Schooley & Worden, 1999).
Young adults. The biannual Jump$tart Survey of Financial Literacy Among High School
students is a widely cited national resource for tracking the financial literacy of high school
students over time (Mandell, 2008). While questions have been raised about the Jump$tart
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 12
survey’s reliability and validity (Lucey, 2005), the general and accepted conclusion is that high
school students lack financial literacy. College students are another group that shows a lack of
financial understanding, especially on developing desirable credit behaviors (for example
Hayhoe, et al., 2000; Lyons, 2008; Xiao, Noring, & Anderson, 1995).
Tax time. Tax time provides one of the most compelling opportunities for providing
financial education to low-income wage earners. Spader, Ratcliffe, and Stegman (2005)
identified several barriers to saving tax refunds, however, including economic hardship and self-
control problems, consistent with prior studies of the use of tax refunds among Earned Income
Tax Credit (EITC) recipients (for example, Smeeding, Ross, Phillips, & O’Connor, 2000).
Research shows that getting tax filers to take action is challenging, and only a small minority
will participate in savings or other programs (Beverly, Romich, & Tescher, 2003; Zinsmeyer &
Flacke, 2007). Duflo, Gale, Liebman, Orszag, and Saez (2006) found that just 14 percent of
clients at a tax-preparation site deposited money into a retirement account even when some were
offered a match for the savings.
Homeownership. Purchasing a home is a key teachable moment in the life cycle that
drives savings and especially credit behavior. Mortgages represented almost 90 percent of an
average household’s total debt obligations in 2004 (Crook & Hochguertel, 2007). Consistent
with Americans’ overall lack of financial literacy, several studies conclude that many home
buyers are ill-informed about the terms of their mortgages (Campbell, 2006; Stango & Zinman,
2006). In addition, many consumers lack an understanding of basic personal finance concepts
including compound interest, risk, and return (Bucks & Pence, 2008; Campbell, 2006).
Borrowers who fail to fully process and understand their mortgage terms may take out higher-
cost mortgages than they otherwise would qualify for (Lax, Manti, Raca, & Zorn, 2004).
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 13
Retirement. Although the decision to save for retirement occurs (or should occur)
throughout one’s working years, for many households intentions to begin saving for retirement
and realized actions deviate significantly (Laibson, Repetto, & Tobacman, 1998). In the
University of Michigan’s Health and Retirement Study’s module on financial literacy and
planning, Lusardi and Mitchell (2006) found that only 56 percent of respondents answered
questions about compound interest and inflation correctly. Workers exhibit bias in holding their
own company’s stocks (Lai & Xiao, 2010) and some do not take advantage of defined
contribution retirement saving plans offered by their employers (Xiao, 1997).
2.4 Parents and Peers
Financial socialization is the process by which individuals acquire and develop
knowledge, beliefs, behaviors, and norms that influence their subsequent financial practices
(Danes, 1994; Rettig & Mortenson, 1986). Two major agents of financial socialization—parental
socialization and financial education—influence financial behaviors (Shim, Xiao, Barber, &
Lyons, 2009).
Parents influence children’s and adolescents’ norms and values—such as thrift, saving,
and materialism—that affect financial behaviors. Children learn thrift (Anderson & Newitte,
2005; Bernheim, Garret, & Maki, 2001) and financial prudence (Hibbert, Beutler, & Martin,
2004). Parents also influence children’s motivation (Beutler & Dickson, 2008), time preference,
delay of gratification (Webley & Nyhus, 2006; Webley & Young, 2006), and future orientation
(Webley & Nyhus, 2006). Time preference, the ability to delay gratification (Hausman, 1979;
Lawrance, 1991), time horizon/time orientation (Fisher & Montalto, 2009), and motivation
(Mandell & Klein, 2007) are associated with positive financial behaviors.
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 14
Financial socialization often begins in the social learning process that takes place in
families. Children may emulate the behaviors their parent(s) demonstrate in their financial
practices and make similar financial decisions due to modeling and observation (Mandrik et al.,
2005). Consequently, children observe and select certain parental models for imitation and tend
to some financial practices over others (Allen, 2008).
Communication between parents and children about money and finances is one key
process in children becoming financially literate. Parents can teach and shape the consumer-
related values and behaviors of their children through dialogue about finances, products,
advertisements, consumption, and purchases (Bakir et al., 2006). For example, parental
communication about television advertisements influences children’s consumer-related
behaviors (Ozmete, 2009).
Children may also learn financial practices through other interactions with parents.
Parents may socialize and educate children about finances by providing allowances, which likely
promote the development of monetary competence (Abramovitch, Freedman, & Pliner, 1991).
Providing an allowance can convey a parent’s confidence in the child’s financial responsibility in
his or her use of the allowance (for example, spending and saving).
Parental monitoring includes use of rules, expectations, and consequences to control,
manage, and influence children’s behavior (Hastings, Utendale, & Sullivan, 2007). Monitoring is
associated with the socialization goals parents have for their children (Hastings & Grusec, 1998).
For example, parental monitoring of everyday routines is important for defining the roles and
responsibilities of children, and their internalization of family values, standards, and expectations
(Laible & Thompson, 2007).
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 15
Parenting aspects, such as warmth and monitoring, influence other key psychological
traits such as time preference and future orientation. Seginer, Vermulst, and Shoyer (2004) found
that parenting styles affect future-related behaviors such as career and marriage. Also, permissive
parenting—the lack of monitoring and rules—is linked to a lack of ability to delay gratification
(Mauro & Harris, 2000). Furthermore, the absence of monitoring and guidance by parents can
inhibit children’s ability to internalize financially prudent behaviors and contribute to the
development of financial anxiety and problematic attitudes towards money (Beutler & Dickson,
2008). Similarly, parents’ inability to provide warmth and comfort during difficult financial
periods could also facilitate the development of financial anxiety among children (Kim et al.,
2010). Such financial anxiety and negative attitudes have been linked to compulsive buying and
credit card misuse (Joiereman, Kees, & Sprott, 2010).
Other parental factors such as income, wealth, education, and race are associated with
the financial socialization process. Parents with more financial resources can provide more
resources that increase human, social, and financial capital for the developing child (Conger &
Dogan, 2007) and provide more access to financial institutions and opportunities to experience
financial services (Johnson & Sherreden, 2007). Additionally, individuals with higher education
are more likely to teach the value of thrift to their children, although they may not necessarily
tend to save more (Anderson & Newitte, 2005). Another finding is that financial anxiety and
negative attitudes can be created and transferred from one generation to the next (Beutler &
Dickson, 2008; Hibbert, Beutler, & Martin, 2004).
Limited research has been conducted about peer influence in financial socialization.
Erskine et al. (2006) found that the identification of peer groups influenced the savings of young
people. Martin and Oliva (2001) pointed to the importance of peer pressure regarding financial
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 16
habits as it affects children, particularly teenagers. Peers often influence the spending and
consumption of children and adolescents, which may become the most common sources of
friction between parents and children. For money matters, evidence shows that parental effects
are greater than peer effects (Xiao, Barber, & Shim, 2008).
2.5 Effects of Financial Education
Researchers have found positive effects of education on financial behaviors. Schooling is
positively associated with financial behaviors such as savings, financial market participation
(Bertaut & Starr-McCluer, 2001; Cole & Shastry, 2009), and portfolio management (Campbell,
2006). Education increases individuals’ ability to acquire and process information to practice
positive financial behaviors. Most researchers have found that financial knowledge is strongly
associated with financial behaviors (Chen and Volpe, 1998; Cude, et al., 2006; Higert, Hogarth,
& Beverly, 2003; Mandell, 2004; Peng, et al., 2007; Tennyson & Nguyen, 2001; Xiao, Tang,
Serido, & Shim, 2009), but a few studies did not find such evidence (Borden, et al., 2008; Jones,
2005). Those with higher levels of financial knowledge are more likely to practice positive
financial behaviors, such as credit card management and basic money managements.
A number of studies have documented positive effects of formal financial education on
financial behaviors (Danes, Huddleston-Casas, & Boyce, 1999; Peng, Bartholomae, Fox &
Cravener, 2007). While financial literacy has been found to be associated with measurable
financial behavior (Lusardi, 2008; Mandell, 2004; Robb & Sharpe, 2009), the effects of financial
education on financial behaviors have had mixed results. Mandell (2006), on the other hand,
found no evidence of the effect of high school financial literacy programs on the financial
behaviors of high school students. Danes (2004) found that high school students who had
financial education reported positive behavioral changes from before class and three months after
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 17
class. Using a sample of college students, Mandell (2009) found financial management or
personal finance courses had significant positive effects on financial behavior, but not on
financial literacy. Shim et al. (2009) found that formal education in personal finance was
positively related to the perception of subjective knowledge, which subsequently influences
financial behavior in college students.
A number of other studies have documented positive effects of financial education on
financial behaviors for adults, such as workplace financial education or community-based
education (Bayer, Bernheim, & Sholz, 2008; Garman et al., 1999; Haynes-Bordas, Kiss, &
Yilmazer, 2008; Kim, 2007; Lyons, Chang & Scherpf, 2005). Sherraden and Boshara (2008)
found positive effects of financial education on savings with IDA program participants. Other
studies have found similar positive effects of financial education (Spader, Ratcliffe, Montoya, &
Skillern, 2009). Workplace financial education has been effective in changing financial behavior
(Garman et al., 1999 ; Kim, 2007). In addition, Clark and d’Ambrosio (2003) have found effects
of financial education on financial behavior such as goal setting and expectation. Lusardi and
Mitchell (2006) found that retirement seminars have a positive wealth effect, but mainly for
those of lower socioeconomic status. Studies have found that education does produce an
intention to change behaviors—but retention of behaviors or follow-through was not significant
(Choi, Laibson, Madrian, & Metrick, 2006; Madrian & Shea, 2001). Workplace financial
education increases financial literacy and contributes to workplace satisfaction (Hira & Loibl,
2005).
Despite the value of financial education in changing the financial behavior of adults,
rigorous evaluation of comprehensive financial education using random assignment has not been
used widely and long-term benefits of financial education on financial behavior have not been
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 18
well-substantiated. Bernheim and Garrett (2001) found respondents who attended high school in
states that mandated teaching of personal finance tended to save more in middle age, while Cole
and Shastry (2009) found no significant effects of state-mandated financial education on
investment behavior.
2.6 Cognition
Past studies have identified cognitive factors associated with variations in financial
literacy and behavior. One cognitive factor highly correlated with financial literacy and behavior
is numeracy—the ability to reason with numbers and other mathematical concepts. For instance,
Benjamin, Brown, and Shapiro (2006) found that mathematical ability is highly related to acting
patiently (that is, being able to focus on the long-term implications of financial decisions and act
accordingly).
Studies have found questions assessing numeracy, numerical reasoning, and word recall
to be strongly predictive of total asset holdings (for example, McArdle, Smith, & Willis, 2009).
Christelis, Jappelli, and Padula (2008) link numeracy, verbal fluency, and memory to
stockownership. Cole, Shastry, and Kartini (2009) found that cognitive ability is associated with
financial market participation.
Recognizing that cognitive abilities decline in old age, some studies have examined the
impact of this decline on financial behavior. For instance, Korniotis and Kumar (2007) measure
whether the financial experience that comes with age is outweighed by the cognitive decline in
old age. They found that, although older investors have acquired more knowledge of investing
relative to their younger peers, they are less capable of applying this knowledge and therefore
have worse investment skill. Agarwal et al. (2009) found that individuals’ financial
sophistication follows a U-shaped course over the life cycle. Financial sophistication increases
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 19
until middle age (the authors estimate age 53 as the peak) and then declines as one’s cognitive
ability begins to deteriorate. While research exists on the decision-making capabilities of people
with intellectual disabilities, few studies have examined financial decision making among this
population with two exceptions (Marson et al., 2000; Suto et al., 2005).
Ameriks, Caplin, and Leahy (2003) developed a theory of the “propensity to plan” to
explain differences in financial planning and wealth accumulation. They found that individuals
with a high propensity to plan create more detailed budgets and regard budgeting as a tool for
controlling their spending. Meier and Sprenger (2007) show that individuals who discount the
future are less likely to participate in a financial education program than individuals who are
more future-oriented. Thus, voluntary financial education programs likely attract highly
motivated individuals who are already more likely to be financially successful than their more
present-oriented peers.
Cognitive aspects of financial literacy remain a rich area of study. The endogeneity of
financial literacy and general cognitive capacity make it difficult to isolate the effects of financial
knowledge. The issue of self-control and time preference also makes distilling the mechanisms
of information challenging to study. Some aspects of financial behavior may be an inherited
characteristic (De Neve, et al., 2009) while others are state specific. A particular focus is on the
ability of people to use mathematics in making financial choices, especially errors in making
time-value of money calculations (Stango & Zinman, 2008).
Children’s cognitive development also may impact financial socialization. Cognitive
learning theory attempts to explain the child’s development in terms of thinking processes,
memory, language, and other mental skills. Cognitive ability, such as numeracy, have been
linked to time preference (Gruber, 2001), financial literacy (Caunt, 2001; Lusardi, 2008; Lusardi
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 20
et al., 2010), and investment (Coleet al., 2009; Christelis, Japelli, & Padula, 2006). Christelis et
al. (2006) found that cognitive ability is associated with stock ownership. However, these studies
used measures of cognitive skills—acquired skills often influenced by cultural and other
socioeconomic backgrounds—rather than cognitive ability. A child’s age impacts the ability to
learn and understand the concept of money in different ways as well (Danes & Dunrud, 1993).
Time preferences, the ability to delay gratification, and a child’s degree of patience are
associated with financial behaviors such as spending and savings for the future (Gruber, 2001;
Joireman, Kees, & Sprott, 2010). Webley and Nyhus (2006) found that time preference patterns
are firmly established at adolescence through childhood learning and socialization. They further
discover that time preferences are passed down through the generations, although the exact
reasons for such a trend remains unexplained. Age and cognitive ability, such as IQ, are also
linked to time preferences.
2.7 Emotion
Emotions may influence financial risk seeking among men and women. The literature on
gender differences in the processing of emotions, value of emotions, intensity of emotions,
emotional regulation, and emotional appraisal, is used to support the premise that emotional
asymmetry among men and women may be a viable explanation for why women take fewer
financial risks than men.
Emotional agency. A behavior qualifies as risky whenever two things are true: (1) the
behavior in question could lead to more than one outcome, and (2) some of these outcomes are
undesirable or even dangerous (Furby & Beyth-Maron, 1992). In a meta-analysis of 150 studies,
Byrnes et al. (1999) found men to be more risk seeking than women in 14 out of 16 types of
risky behaviors (especially in taking physical risks).
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 21
Two theories, sensation-seeking (Zuckerman, 1990) and risk-as-value (Kelling, Zirkes, &
Myerowitz, 1976) identify why men may have higher preferences for risky options: (1) naturally
lower levels of arousal in men, and (2) a socially instilled belief that risk taking is a highly
valued masculine tendency.
A lower baseline for arousal among men may explain why men are drawn to emotions
that are high in arousal. Emotions vary along two main dimensions, arousal (low/high) and
valence (positive/negative). Agency theory indicates that men and women value different
emotions (Dube & Morgan, 1996; Scherer, 1984). Due to their close association with control,
power, anger, joy, and happiness have been consistently linked with high agency, whereas
warmth, sadness, empathy, fear, and anxiety are associated with vulnerability, and are low in
agency (Scherer, 1984). Agency concerns are more relevant to men since they are driven by
mastery goals and are socialized to express high agency emotions (Kring & Gordon, 1998). The
result is that men are likely to discount the salience of weak emotions such as anxiety and
sadness and empathy by distracting themselves, typically through physical activity (Kring &
Gordon, 1998). By contrast, women are socialized to ignore agency concerns and thus are more
likely to use a wider range of emotions than men, including emotions that imply weakness,
dependency or vulnerability such as sadness and fear (Broverman et al., 1972; Dube & Morgan,
1996; Meyers-Levy & Maheswaran, 1991; Wagner, Bruck, & Winterbotham, 1993).
Emotional intensity. Another explanation for gender differences in risky behaviors may
result from different probabilities and severities of negative outcomes. Women perceive more
risk and are less likely to engage in risky behaviors than men in a variety of broad domains,
including finances (Weber, Blais, & Betz, 2002). To test the reasons underlying the greater
propensity for men to take more risks than women, Harris, Jenkins, & Glaser (2006) separated
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 22
the probability of negative outcomes, severity of potential negative outcomes, and expected
enjoyment from the risky activities. They argue that women may not evaluate the probability of
negative outcomes differently than men—they simply may realize that they would be more
emotionally upset or harmed by the negative consequences. Consistent with their hypothesis,
they found that women have greater perceived likelihood of negative outcomes and lesser
expectation of enjoyment, and this mediates their lower propensity towards risky behaviors in
domains such as gambling and health (Harris, Jenkins, & Glaser, 2006).
The literature on emotions supports the view that women will engage in more emotional
appraisal than men, and weigh negative emotions more than positive emotions. Although men
and women report equal intensity of emotions (Kring & Gordon, 1998), self-reports indicate that
women have more frequent (Feldbam et al., 1998) and intense emotional experiences than men
(Birnbaum, Nasonchuk & Croll, 1980; Fujita, Diener, & Sandvik, 1991), and place greater value
on their emotional states (Dube & Morgan, 1998). The result may be that women employ more
emotion-focused coping and decision making than men (Baker & Berenbaum, 2007).
It may be difficult for women to ignore their emotions in financial decision making
because they feel emotions more intensely than men. Emotional intensity (how intensively
people respond to an emotion stimulus) is response intensity to a given level of emotion-
provoking stimulation (Larsen & Diener, 1987). Other than pride, women feel all emotions more
intensely than men (Brebner, 2002). Emotional intensity may explain the seemingly
contradictory findings that women report more unhappiness than men, but are equally happy
(Fujita, Diener, & Sandvik, 1991). According to this view, women are more emotionally intense
than men, allowing them to experience both more joy and more sorrow. Men on the other hand,
are more reluctant than women to admit that they have a problem and seek help for it.
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 23
Processing of emotions. The literature on gender differences in processing style also
provides indirect support for a higher risk profile among men than women. Women are more
involved audiences as evidenced by their tendency to engage in more detailed information-
processing strategies than men (Meyers-Levy & Maheswaran, 1988; Meyers-Levy & Sternthal,
1991). Thus, risk profiles among women may be lower than risk profiles among men because
they are more likely to engage in a more detailed cost-benefit analysis. Consistent with this view,
female managers are more risk-averse, follow less extreme and more consistent investment
styles, and trade less than male managers (Niessen & Ruenzi, 2007). Women not only process
information in more detail than men, but they are more likely to use emotions as inputs for
financial decisions (Beck, 1967, 1976; Larsen, Diener, & Cropanzano, 1987).
Emotional appraisal. Why don’t women seek financial rewards like men? One possible
explanation is that their probabilities for investment success is lower than men as also may be
their enjoyment in playing the investment “game” (Harris, Jenkins, & Glaser, 2006), which it
implies that women may not be as motivated to invest because they don’t think they will succeed
and because it is not as enjoyable to them as it is to men.
The emotion appraisal literature provides insights on how a combination of emotions may
help predict risk aversion among women. According to the emotional-appraisal literature, people
examine their feelings to guide their preferences and actions. Each emotion, defined by its
accompanying appraisal, guides its own innate action tendency (Frijda, Kuipers, & Schure, 1989;
Passyn & Sujan, 2006; Roseman, Wiest, & Swartz, 1994; Smith, et al., 1993). The emotional
appraisals and action tendency associated with fear, especially high levels of fear, is likely to be
safety and flight away from the danger. Meanwhile, the emotional appraisals and action
tendencies associated with anxiety are uncertainty and need for control of the events leading up
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 24
to a potential threat (Raghunathan & Corfman, 2004; Raghunathan, Pham, & Corfman, 2006;
Rapee et al., 1996; Smith & Lazarus, 1993). Compared to fear, anxiety also is a self-directed
emotion (Miceli & Castelfranchi, 2005).
Sadness is appraised in a different manner than fear and anxiety. In contrast to anxiety,
which prompts a desire for certainty, the appraisal for sadness is loss and the seeking of rewards.
To test this premise, Raghunathan and his colleagues (Raghunathan and Corfman, 2004, 2006;
Raghunathan and Pham, 1999; Raghunathan, Pham, and Corfman, 2006) compare risk-seeking
among sad, fearful, and anxious participants who vary on appraisals of loss and uncertainty.
They found that, as compared to anxious participants, those who are sad seek to overcome loss
by trading off certainty for rewards. By contrast, anxious participants prefer the more certain
option. Compared to men, women are more likely to acknowledge and use sadness to guide their
actions, but they may not engage in financial actions because the results may not be viewed as
rewards. Anxiety about decisions may signal a need for control to reduce uncertainty
(Raghunathan, Pham, & Corfman, 2006).
Emotional dependence. It is commonly acknowledged that women are more sensitive to
the needs and opinions of others than men. Emotional self-relatedness refers to the degree to
which specific emotions vary in the extent to which they follow from, and also foster or
reinforce, an independent versus interdependent self (Agarwal, Aaker, & Menon, 2007; Lee,
Aaker, & Gardner, 2000). In contrast to other-focused emotions such as empathy, self-focused
emotions such as happiness and sadness, tend to be associated with an individual’s internal state
or attributes, to the exclusion of others (Lee, Aaker, & Gardner, 2000). Since men are more self-
focused than women, women express more concern with interpersonal relationships and greater
empathy for others’ emotional experiences than men (Eagly & Wood, 1991). These studies may
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 25
explain why women are more anxious about carrying debt for family expenses than men
(Lusardi, Keller, & Keller, 2008). These results also are consistent with studies showing women
are more emotionally secure when they work with a financial advisor (Allianz Life Insurance,
2006; Lyons et al., 2007).
2.8 Psychological Bias
Economic and financial decision makers are classically viewed as rational actors.
However, due to human limits in information processing and sense making, rationality is limited
to some degree (March & Simon, 1958). We know, therefore, that some economic and financial
actors make cognitive errors and behave in less than fully rational manners (Ariely, 2009; Thaler,
1985). How people perceive and process their social world can also influence decisions
(Bazerman & Tenbrunsel, 1998). Moreover, decision-making processes include an emotional
component that can have a significant influence on economic transactions (Lerner, Small, &
Loewenstein, 2004). Although they constitute a mechanism for constraining and directing
attention (Levenson, 1999; Matthews & Wells, 1994), feelings can be counterproductive in
financial contexts in which the influence of emotions on decision-making processes is high—for
example, when information becomes voluminous and complex (Shiv & Fedorikhin, 1999) and
when extreme events occur such as stock market bubbles and crashes (Shiller, 2002). The field
of behavioral economics seeks to more accurately frame economic and financial actions given
the “defects” in human wiring that hamper rationality.
Prospect theory (Kahneman & Tversky, 1979) challenges the tenets of classic utility
theory and offers an alternative model for decision making under conditions of risk. According
to prospect theory, decision makers tend to underweight prospective outcomes perceived as less
certain relative to outcomes that are deemed more certain. This promotes a “negativity bias,” or
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 26
a risk aversion in choices involving gains and risk seeking in choices involving losses. Behavior
also tends to be influenced by the reference point of a choice, a phenomenon known as framing
or anchoring (Tversky & Kahneman, 1974). For example, when determining the disposition of
an investment position (that is, buy, sell, or hold), individuals often pay more attention to the
asset’s current price relative to the acquisition price rather than focusing on forward-looking
analysis (Zhang & Semmler, 2008). An important implication of prospect theory is that decision
makers are prone to act based on changes in wealth rather than on wealth levels, and are more
sensitive to losses than to gains (Dacey & Zielonka, 2008; Kahneman & Tversky, 1979). Beyond
investing, prospect theory has been applied to a variety of financial decision-making situations
ranging from personal accounting systems to resource allocation (Thaler, 1985) to the payment
of taxes (Dhami & al-Nowaihi, 2007).
A robust finding in psychology is that people are generally overconfident (Thaler, 1999).
Individuals tend to overestimate their knowledge and abilities, while underweighting some types
of information and overweighting others (Odean, 1998; Stone, 1994). When presented with new
information, people generally emphasize the importance of information that confirms their
personal beliefs while discounting information that may falsify those beliefs (Klayman & Ha,
1987; Koehler, 1991). In a related manner, people tend to attribute events that confirm the
validity of their actions to high ability, and events that disconfirm actions to randomness or
sabotage (Bem, 1965; Miller & Ross, 1975). Researchers studying the influence of such
“attribution bias” on financial market behavior have found that overconfidence relates to a wide
range of phenomena, including elevated trading frequencies, reduced levels of diversification,
and extreme reactions surrounding news events (Daniel, Hirshliefer, & Subrahyaman, 1998;
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 27
Kyle & Wang, 1997; Odean, 1998). Experts believe that overconfidence increases with
experience (Griffin & Tversky, 1992).
2.9 Cultures, Media, Moral Hazard, and Socionomics
Studies of culture and consumer financial behavior can be examined on both an inter-
cultural and intra-cultural basis. Findings generally suggest that people from countries with more
collectivistic cultures possess lower risk tolerance than more individualistic cultures (for
example, Bontempo, Bottom, & Weber, 1997; Keh & Sun, 2008). Cultural differences also result
in differences in saving motives as shown in a study comparing American and Chinese behaviors
(Xiao & Fan, 2002).
Culture and society can also exert endogenous influence on personal financial behavior.
Because financial markets are complex social phenomena (Peters, 2003), proficient financial
decision making requires deep-seated intelligence unlikely to be obtained from codified sources
alone (Leonard & Swap, 2005). In complex environments, decision-making skills are influenced
by social mechanisms in which individuals learn by observing the behavior of others (Bandura,
1977, 1986; Rosenthal & Zimmerman, 1978). The role of social learning in shaping personal
financial decisions remains largely untapped. For instance, sources of financial information, such
as coursework (Krishnan et al., 1999; Pritchard et al., 2004) and media news streams (McClune,
2009), may emit societal cues that portray markets as difficult to successfully navigate (for
example, Lim, 2004), thereby evoking perceptions of threat and avoidance behavior. On the
other hand, some information sources, perhaps combined with facilitating technology, might
channel social learning mechanisms in a positive manner that promotes knowledge and skill
development (Ford, Kent, & Devoto, 2007; Moy, 1995).
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 28
Moral hazard is defined as the tendency to take more risk when it is perceived that losses
incurred as a consequence of risky behavior will be covered by someone else. The term’s
insurance industry origins (Baker, 1996) are not surprising, since moral hazard can be viewed as
a condition that is activated when behavioral outcomes have been insured or subsidized to some
degree. One stream of moral hazard research relevant to personal finance uses individuals as the
primary unit of analysis, and examines various financial decisions that are subject to moral
hazard influence. For example, conditions of moral hazard may discourage diligence when
searching for financial services, such as bank accounts, that have been guaranteed or insured (for
example, Cartwright & Campbell, 2003; Dionne, 1981). Consumers might also take on more
debt if they anticipate that bankruptcy laws will permit discharge of liabilities in the event of
financial hardship (Grochulski, 2010). In highly insured sectors such as automotive and health
care, consumption of services may be higher and behavior riskier when insured (Hoyt, Mustard,
& Powell, 2006; Koc, 2005; Stanciole, 2008).
A developing thread of behavioral research that may inform the field of personal finance
concerns the notion of socionomics. The primary thesis of socionomics is that collective levels of
optimism or pessimism in society, referred to as social mood (Prechter, 1999) or background
mood (Loewenstein et al., 2001), influence decisions made in complex social environments such
as financial markets. Social mood can be viewed as grounded in the concept of emotional
contagion (Olson, 2006). Social comparison theory (Festinger, 1954; Schacter, 1959) suggests
that affiliating with others produces pressure to establish a common social reality that includes a
shared emotional state. The result is a tendency to “catch” the emotions of others via an
unintentional, largely unconscious process (Hatfield, Cacioppo, & Rapson, 1993).
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 29
The primary behavioral expression of social mood in financial markets is unconscious
herding (Prechter, 2001). Simply put, herding is following the crowd—a collection of individuals
pursing the same signal in a mostly unconscious manner. In financial markets, herding drives
groups of investors to trade in the same direction with persistence, resulting in auto-correlated
trends in prices followed by trend reversals (Nofsinger & Sias, 1999). Prechter & Parker (2007)
argue that herding pervades financial markets because of the motivational dynamics of financial
behavior. In utilitarian markets in which goods and services are owned for production, pleasure,
or consumption purposes, economic calculations based on the laws of supply and demand drive
decision making. In financial markets, however, financial goods (that is, investments) are
primarily owned in order to be sold at higher prices to others. The basis for success is knowing
how others will value the investments in the future, something that cannot be known with
certainty and is not particularly amenable to economic calculation. Faced with uncertainty about
the future valuations of others, financial decision makers tend to follow the buying and selling
signals generated by the herd. Because general levels of optimism and pessimism may be
reflected in herding impulses throughout society, financial markets have been proposed as
coincident indicators of social mood (Nofsinger, 2005).
Several remedial strategies might mitigate the negative effects of bounded rationality and
emotion on financial decision making. Introducing “devil’s advocates” or other means of dissent
into decision-making processes provides alternate viewpoints and stimulates original thought
(Nemeth, Connell, Rogers, & Brown, 2001). In addition, reducing reliance on popular
information outlets might encourage unique and novel behavior (Weick, 1976) rather than
impulsive herding. Automating saving and investment processes (for example, Thaler &
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 30
Benartzi, 2004) also has been proposed to reduce emotional influences on financial decision
making.
3. Implications for Financial Education
3.1 Implications for Financial Education Policies
• Action-oriented financial education should be promoted at the national level. To develop
effective national strategies, research needs to be conducted to assess the educational
needs of various socioeconomic populations regarding key financial behaviors such as
credit management and saving for retirement in terms of their behavior development
stages and education focuses such as awareness and action.
• We need to reassess our individual financial education outreach campaigns to include a
more encompassing perspective that seeks to provide financial information as a “whole-
family” initiative. As researchers, our focus on the financial behaviors of individuals is
inadequate to fully understand the current intergenerational household formation that
appears to be escalating as a result of the current financial crises. As adult children move
back into elder parents’ households—three to four generations living under one roof in
order to safeguard asset accumulation, minimize financial losses, and maximize
economic security—may become the new “normal.”
• We need to focus on key teachable moments during which public policy can have an
effect such as entrance or exit from Unemployment Insurance, Food Stamps,
Supplemental Security Income, or other income support programs.
• We need to identify areas of content versus skills that need to be learned and practiced, as
well as certain points in the life course when expert counsel should be required. There
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 31
may be a role for policies to prevent very challenging financial products from being
available for some consumers. In other cases, support, training, and counseling may be
provided along with various financial products.
• We need to integrate risk management concepts more sufficiently into the financial
literacy domain. Empirically, we observe significant numbers of consumers taking what
may be insufficient financial risk (for example, being unbanked, no risk market
participation) while others assume seemingly excessive risk (for example, high debt and
leverage, large risk market allocations). Absent the capacity for effective risk
management, individuals are less likely to achieve desirable financial security.
• National financial education strategies should consider moral hazard. It is easy, for
instance, to doubt the credibility of government-sponsored financial literacy initiatives
when the financial behavior of government policymakers themselves can be construed as
reckless. A “do as I say, not as I do” situation appears to be present. The financial
behavior of policymakers also could foster conditions of moral hazard. It seems plausible,
for instance, that some people fail to recognize the need for financial education because
they think the government will cover their losses in the event of poor decisions. If
interventions such as interest rate manipulations, economic stimulus packages, and bank
account insurance increase risky behavior among sophisticated market participants, there
is reason to believe moral hazard touches the domain of personal financial decisions as
well.
3.2 Implications for Financial Education Practices
• Financial education should encourage individuals to engage in desirable financial
behaviors. Behavior development has several stages according to the Transtheoretical
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 32
Model of Behavior Change (TTM). To use education as an effective intervention tool, the
focus of the education should correspond to various behavior change stages to achieve
optimal results (Figure 1).
• While behavioral mechanisms are useful such as the requirement to opt out of rather than
opt into a defined contribution retirement plan, mechanisms are not enough. People also
need knowledge to manage contributions as well as how to tap resources as retirement
approaches.
• The model of education needs to be examined in a cumulative fashion over the life
course, including the mode of delivery. One-time workshops may have little effect on
promoting desirable financial behaviors while multi-year interventions may do.
• There is strong interplay between products and behavior. The availability of simple, easy to
manage transaction accounts, loans and savings vehicles can reduce complexity and
minimize the harm for low functionally financial literate consumers.
• Financial education should include risk-management concepts. For educators, this might
mean developing observational learning platforms where students can learn vicariously
about effective and ineffective risk management strategies—thus reducing the costly
“tuition” paid when making hands on financial mistakes.
• Financial education should address needs of diverse populations. Multiple identities;
intersectionalities of gender, racio-ethnicity, and class; multi-lingualism and multi-
culturalism remain part of America’s immigrant history and increasingly define our
collective present. If our financial education practices do not account for the variation in
our diverse communities with respect to individual behaviors oriented towards family
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 33
economic security, we will have missed a significant opportunity to bring education
approaches that deliver proficient, durable skills in the complex social context of real-life
markets.
• Financial educators should provide multiple teaching approaches based on theory and
research-based practice. Developing skills for navigating complex social systems requires
deep-seated intelligence unlikely to be obtained from classrooms alone. Social learning,
in which individuals learn by observing the behavior of others in action, provides one
mechanism for developing sophisticated, hard-to-teach skills. In the context of financial
education, observational learning offers the added benefit of reducing the cost of poor
financial decisions inevitably made when developing first-hand experience. Research has
probed the value of web-based vicarious learning platforms that permit students to
observe the behavior of financial experts in action. Exposure to such platforms can
improve financial market knowledge and decision-making skills.
• Financial educators may use different teaching strategies for women and men. When it
comes to protecting themselves via financial planning, women face a double whammy
because they have high threat appraisal (high anxiety and fear) and low self-
efficacy/confidence in their ability to do so. By contrast, men may be overconfident
because they have low threat appraisal and high self-efficacy.
• Financial education needs to start early when individuals not only acquire financial
knowledge and skills from families but develop social and psychological traits that
influence future financial attitudes and behaviors at early stage of their lives. Without the
intervention of other socialization agents such as schools and workplaces, gaps in
financial behavior will be wider for those who do not have opportunities for appropriate
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 34
financial socialization process from family at young age.Figure 1 Action-Oriented
Education
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 35
Figure 1 Action-Oriented Education, Adapted from Prochaska et al. (1992)
Stage of Behavior Change
Precontemplation Contemplation Preparation Action Maintenance
Cognition Emotion Social ibilit
Self-image
Commitment
Relationship Reward
Substitute Stimulus
Education support
Notes: The above chart is adopted from Prochaska et al. (1992). Some terms are modified to fit the purpose of
financial education. 1. Cognition: Education focuses on awareness of the importance of the behavior by providing knowledge and
skills. This and the following two interventions are more effective for moving people from pre-contemplation to contemplation.
2. Emotion: Education focuses on awareness by arousing emotions. 3. Social responsibility: Education focuses on awareness by stressing the social impact of a behavior change. 4. Self-image: Education focuses on the new self-image to move people from contemplation to preparation. 5. Commitment: Education focuses on personal commitment to move people from preparation to action. 6. Relationship: Education focuses on using family and close relationships to facilitate behavior change. This
and the following three interventions are effective to move people from action to maintenance. 7. Reward: Education focuses on nonfinancial awards for desirable behavior change. 8. Substitute: Education focuses on establishing desirable substitute behavior for behavior change. 9. Stimulus: Education focuses on removing/adding stimuli to facilitate behavior change. 10. Education support: Provides various forms of education support to facilitate behavior change. This
intervention is effective for all stages.
A REVIEW OF FINANCIAL BEHAVIOR RESEARCH: IMPLICATIONS FOR FINANCIAL EDUCATION 36
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