Financial Responsibility, Personality Traits and Financial Decision ...

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During the past decade, governments around the globe have started advocating a new and responsible approach to personal finance, to encourage households to be more in charge of their own financial situation. The 2008 financial crisis and the recession that followed hit families hard, and has shifted government policy away from promoting cheap financing, more often used for increased consumer spending towards enhancing consumer awareness of individuals long term financial needs and resources. This shift increases the importance of financial responsibility, and to a large extent depends on the financial literacy of households. We aim to investigate if financial knowledge and financial awareness is a first condition for acting more responsibly, or if personality traits and upbringing are more important factors in this process. Demographic ageing is one of many social trends that is putting additional pressure on the financial sustainability of conventional healthcare and pension plans. As the pro- portion of elderly rises steadily, costs are approaching levels that can no longer be borne by national government budgets alone. As a consequence, households are also forced to take financial matters more into their own hands. Theoretical life cycle models predict that consumers smooth consumption over their lifetime, assuming that consumers are forward looking and make plans for the future . But whether households are actually able and ready to manage their long-term financing responsibly is doubtful. Campbell (2006) already points out that it is often difficult for consumers to exhibit carefully reasoned and informed economic decisions. Lusardi and Mitchell (2007) show that 45 per cent of baby-boomers in the age bracket 51-56 have done little or no retirement planning at all, and as a result they enter their golden years with low levels of wealth. One important factor that triggers the extent of financial planning is financial literacy the set of skills and knowledge that allows an individual to make informed and effective 2
decisions through their understanding of finances. Using a set of carefully constructed survey question Lusardi and Mitchell (2007) calibrate a measure for the level of financial literacy on a household level, and find empirical evidence that financial literacy is an important aspect for taking decisions towards financial planning for the future. Financial Literacy is not a new concept. In 2003 the Organization for Economic Co-operation and Development (OECD) started an intergovernmental financial literacy project. The main objective of this project is to provide ways to improve financial education and literacy standards through the development of common financial literacy principles. In late 2005 an international OECD survey study showed that 67 per cent of Australian respondents indicated that they understood the principle of compound interest, yet when they were asked to solve a problem using this concept only 28 per cent had a good level of understanding. Results showed that British respondents do not actively seek out financial information. Instead, the information that they did acquire was collected on the off- chance, for example by picking up a pamphlet at a bank. Results from the Canadian survey showed that respondents considered invest- ment choice to be more stressful than going to the dentist. These compelling results have attracted the attention of policymakers, as new acts and taskforces have been put in place to promote financial planning and capabilities. Whilst on the one hand we wish to promote as a society individual choice and taking into account our own finances in a responsible manner, unless we have the correct knowledge, literacy and ability to do so, then there still remains a role for government intervention and regulation on savings behavior at the national level. To be able to shed greater light on policy making in this area we need to understand attitudes towards financial decision-making and savings behavior in greater depth. Behavioral finance allows for individual heterogene- 3
Page 1: Financial Responsibility, Personali
Page 5 and 6: literacy test are 38% more likely t
Page 7 and 8: for their retirement, and thereby r
Page 9 and 10: In total, the survey consists of 62
Page 11 and 12: e good at mathematics, and merely 1
Page 13 and 14: looked at in detail later, and is o
Page 15 and 16: striking are the low scores that we
Page 17 and 18: these two household demographics re
Page 19 and 20: savers, the only interaction effect
Page 21 and 22: References [1] Berman, A. and T. Ha
Page 23 and 24: [19] Modigliani, F., Brumberg,R., 1
Page 25 and 26: Table 1: Summary statistics Total s
Page 27 and 28: Table 3: Robustness test of savings
Page 29 and 30: Table 5: Logit regressions on obser
Page 31 and 32: % Savers 60 50 40 30 20 10 0 Male F
Page 33 and 34: - It is hard to find a good financi
Page 35 and 36: C Financial Literacy Mean Stdev Min
Page 37 and 38: 100% 80% 60% 40% 20% 0% > 1960 1945

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