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The differential impact of cognitive style on the relationship between financial education and financial literacy

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Abstract

Past studies have examined the role of financial education on financial literacy, often with mixed results. While some studies have shown a positive effect, others have indicated null or even negative effects. Given that much public faith is given to financial education as a means for improving consumers’ financial wellbeing, a deeper understanding of the relationship between financial education and financial literacy is needed. A factor that may moderate this important relationship is cognitive style, which reflects the information processing strategies of consumers. At the two extremes of the cognitive style spectrum are analytical and intuitive consumers, and in the intermediate ranges are adaptive consumers who combine analysis and intuition to different degrees. Using a national panel of American consumers, the moderating role that cognitive style plays in this relationship is empirically examined. The findings indicate that while consumers with analytical and intuitive cognitive styles develop higher financial literacy levels as a result of financial education, the financial literacy levels for consumers with adaptive cognitive styles diminishes with financial education. The potential role of self-assessed investment knowledge in this relationship is examined and implications on curriculum design for financial education programs as well as related research needs are discussed.

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Authors and Affiliations

  1. Gabelli School of Business, Fordham University, 400 Westchester Ave., West Harrison, NY, 10640, USA

    Hooman Estelami

  2. Gabelli School of Business, Fordham University, 441 East Fordham Road, Bronx, NY, 10458, USA

    Nicole N. Estelami

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  1. Hooman Estelami
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Correspondence to Hooman Estelami.

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Appendices

Appendix A: Summary of prior studies on the relationship between financial education and financial literacy

Study

Findings

Brimble and Blue (2013)

Examines the outcomes of four financial literacy education programs among indigenous communities, highlighting the need for contextualized program development

Brugiavini et al. (2020)

Studies the effects of financial education intervention among college students and finds positive results on objective and subjective financial knowledge

Fernandes et al. (2014)

Using a meta-analysis conducted on nearly 200 published studies, the findings indicate that interventions in the form of financial education only explain 0.1% of the variance in financial behaviors examined in prior studies. The effects of financial education significantly drop after 20 months following educational exposure

Fox et al. (2005)

Examines the effectiveness of a range of financial education programs and highlights the need for objective and accurate measurement of program outcomes in order to be able to establish program effectiveness

Jariwala and Sharma (2013)

Using a sample of homemakers, the study carries out an experiment to pre- and post-measure the effects of financial education on financial behavior, finding a positive effect

Kalwij et al. (2019)

Examines the effects on primary school children for a 45-min financial education program. The findings indicate that only a portion of the improvement in financial literacy measures can be attributed to the program

Kim et al. (2020)

Using the National Financial Capability dataset, objective financial literacy is found to have a negative effect on mortgage delinquency rates, while subjective financial literacy is found to have no effect

Lusardi and Mitchell (2014)

Draws on a review of previously published studies to examine how much or how little consumers possess financial knowledge and examines the effects of financial education on financial decisions, identifying areas in need of improvement

Mandell and Schmidt-Klein (2009)

Examines the long-term effects of financial education on financial literacy for high school students. The findings show that no difference is found in the financial literacy scores of those students who took a financial management course up to 4 years earlier, and those students who never took such a course

van Rooij et al. (2011)

Higher levels of financial literacy are associated with greater degree of participation in the stock market

Wagner (2019)

Using the National Financial Capability Study dataset, the study finds that the effects of financial education on financial literacy are not equally evident for all consumers, with greater effects found among consumers who have lower levels of income and education

Wagner and Walstad (2019)

Using the National Financial Capability Study dataset, the study finds that financial education has positive effects for long-term financial behaviors such as investments and home ownership, but no effects on short-term financial behaviors, such as those related to paying off credit card bills. The study suggests that depending on the time horizon associated with a financial decision, the effects of financial education on behavior may significantly vary

West (2012)

Using a consumer sample, demonstrates that the financial behavior of financially literate individuals does not necessarily result in rational decisions

Wills (2011)

Reviews prior research studies, questioning the assumed causal chain between financial education and well fare improving financial behaviors of consumers. Suggests approaches other than financial education for improving consumers’ financial wellbeing

Yates (2019)

Finds asymmetric effects of financial education exposure, such that exposure does not cause as great a positive change in financial literacy scores as does lack of exposure in reducing the scores

Appendix B: Financial literacy scale used in this study

(1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow?

□ More than $102 □ Exactly $102 □ Less than $102

(2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?

□ More □ The Same □ Less

(3) Buying the stock of an individual company usually provides a safer return than a stock mutual fund.

□ Agree □ Disagree

(4) If interest rates rise, what will typically happen to bond prices?

□ They will rise □ They will fall □ Do not know

(5) Which of the following statements describes the main function of the stock market?

□ The stock market brings people who want to buy stocks together with those who want to sell stocks

□ The stock market helps to predict stock earnings

□ The stock market results in an increase in the price of stocks

□ None of the above

(6) Which of the following statements is correct? If somebody buys the stock of firm B in the stock market:

□ He is liable for firm B's debts

□ He owns part of firm B

□ He has lent money to firm B

□ Do not know

(7) Which of the following statements is correct? If somebody buys a bond of firm B:

□ He is liable for firm B's debts

□ He owns part of firm B

□ He has lent money to firm B

□ Do not know

(8) Normally, which asset displays the highest fluctuations overtime?

□ Stocks □ Savings accounts □ Bonds □ Do not know

(9) When an investor spreads his/her money among different assets, the risks of losing money:

□ Decrease □ Increase □ Stay the same □ Do not know

(10) Considering a long time period (for example 10 or 20 years), which asset normally gives the highest return?

□ Stocks □ Savings accounts □ Bonds □ Do not know

Note: All responses in italics are the correct response. For each respondent the total of correct responses was used to quantify his/her financial literacy score.

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Estelami, H., Estelami, N.N. The differential impact of cognitive style on the relationship between financial education and financial literacy. J Financ Serv Mark (2023). https://doi.org/10.1057/s41264-022-00204-6

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