Abstract
Findings concerning the circumstances in which financial literacy training is effective seem inconsistent. This chapter aims at bringing order to this vexing situation. Its central thesis is that people’s aptitude to deploy their financial literacy relies on their ability to use cognitive and mental resources. This depends on various factors, some endogenous (i.e., personality and cognitive traits such as intelligence and quality of self-control and executive functions) and some external. Among the external ones, we examine economic circumstances and the features of the financial task itself. Predictions from the model include that certain financial tasks, which are relatively simple and deliver prompt results, benefit from financial literacy training, whereas others, with less clear payoffs and only in a distant future, do not. People in straightened economic circumstances who experience scarcity have fewer resources and do not deploy what financial insights they acquired. Our predictions were all borne out by a study on an extensive program of financial training.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Ando, A., & Modigliani, F. (1963). The “life cycle” hypothesis of saving: Aggregate implications and tests. The American Economic Review, 53(1), 55–84.
Atkinson, A., McKay, S., Collard, S., & Kempson, E. (2007). Levels of financial capability in the UK. Public Money and Management, 27(1), 29–36.
Atkinson, A., & Messy, F. A. (2012). Measuring financial literacy: Results of the OECD/International Network on Financial Education (INFE) pilot study.
Baumeister, R. F. (2002). Yielding to temptation: Self-control failure, impulsive purchasing, and consumer behavior. Journal of Consumer Research, 28(4), 670–676.
Carmel, E. (2018). Towards a dual process conception of the selective influence of financial literacy on economic behavior. Doctoral dissertation, Ben-Gurion University of the Negev, Beer Sheva, Israel.
Chaiken, S., & Trope, Y. (1999). Dual-process theories in social psychology. New York, NY: Guilford Press.
Chakravarti, D. (2006). Voices unheard: the psychology of consumption in poverty and development. Journal of Consumer Psychology, 16(4), 363–376.
Clark, R. L., Morrill, M. S., & Allen, S. G. (2012). The role of financial literacy in determining retirement plans. Economic Inquiry, 50(4), 851–866.
Cole, S. A., & Shastry, G. K. (2009). Smart money: The effect of education, cognitive ability, and financial literacy on financial market participation. Boston, MA: Harvard Business School.
De Meza, D., Irlenbusch, B., & Reyniers, D. (2008). Financial capability: A behavioural economics perspective. London, UK: Financial Services Authority.
Drexler, A., Fischer, G., & Schoar, A. (2014). Keeping it simple: Financial literacy and rules of thumb. American Economic Journal: Applied Economics, 6(2), 1–31.
Ericson, K. M. (2017). On the interaction of memory and procrastination: Implications for reminders, deadlines, and empirical estimation. Journal of the European Economic Association, 15(3), 692–719.
Evans, J. S. B., Handley, S. J., & Bacon, A. M. (2009). Reasoning under time pressure: A study of causal conditional inference. Experimental Psychology, 56(2), 77.
Fernandes, D., Lynch, J. G., Jr., & Netemeyer, R. G. (2014). Financial literacy, financial education, and downstream financial behaviors. Management Science, 60(8), 1861–1883.
Finucane, M. L., Alhakami, A., Slovic, P., & Johnson, S. M. (2000). The affect heuristic in judgments of risks and benefits. Journal of Behavioral Decision Making, 13(1), 1.
Galai, D., & Sade, O. (2006). The “ostrich effect” and the relationship between the liquidity and the yields of financial assets. The Journal of Business, 79(5), 2741–2759.
Gollwitzer, P. M. (1999). Implementation intentions: Strong effects of simple plans. American Psychologist, 54(7), 493.
Haushofer, J., & Fehr, E. (2014). On the psychology of poverty. Science, 344(6186), 862–867.
Hilgert, M. A., Hogarth, J. M., & Beverly, S. G. (2003). Household financial management: The connection between knowledge and behavior. Federal Reserve Bulletin, 89, 309.
Huston, S. J. (2010). Measuring financial literacy. Journal of Consumer Affairs, 44(2), 296–316.
Kahneman, D. (2011). Thinking, fast and slow. New York, NY: Macmillan.
Kaiser, T., & Menkhoff, L. (2017). Does financial education impact financial literacy and financial behavior, and if so, when? Washington, DC: The World Bank.
Karlan, D., McConnell, M., Mullainathan, S., & Zinman, J. (2016). Getting to the top of mind: How reminders increase saving. Management Science, 62(12), 3393–3411.
Karlsson, N., Loewenstein, G., & Seppi, D. (2009). The ostrich effect: Selective attention to information. Journal of Risk and Uncertainty, 38(2), 95–115.
Leiser, D., & Shemesh, Y. (2018). How we misunderstand economics and why it matters: The psychology of bias, distortion and conspiracy. London, UK: Routledge.
Loewenstein, G., & Prelec, D. (1992). Anomalies in intertemporal choice: Evidence and an interpretation. The Quarterly Journal of Economics, 107(2), 573–597.
Loibl, C. (2017). Living in poverty: Understanding the financial behaviour of vulnerable groups. Economic Psychology, 421–434.
Lusardi, A., & Mitchell, O. (2007b). Financial literacy and retirement preparedness: Evidence and implications for financial education. Business Economics, 42(1), 35–44.
Lusardi, A., & Mitchell, O. S. (2007a). Baby boomer retirement security: The roles of planning, financial literacy, and housing wealth. Journal of Monetary Economics, 54(1), 205–224.
Mani, A., Mullainathan, S., Shafir, E., & Zhao, J. (2013). Poverty impedes cognitive function. Science (New York, N.Y.), 341(6149), 976–980.
Miller, M., Reichelstein, J., Salas, C., & Zia, B. (2015). Can you help someone become financially capable? A meta-analysis of the literature. The World Bank Research Observer, 30(2), 220–246.
Modigliani, F., & Brumberg, R. (1954). Utility analysis and the consumption function: An interpretation of cross-section data. Franco Modigliani, 1, 388–436.
Mullainathan, S., & Shafir, E. (2013). Scarcity: Why having too little means so much Macmillan.
Rabinovich, A., & Webley, P. (2007). Filling the gap between planning and doing: Psychological factors involved in the successful implementation of saving intention. Journal of Economic Psychology, 28(4), 444–461.
Rha, J., Montalto, C. P., & Hanna, S. D. (2006). The effect of self-control mechanisms on household saving behavior. Financial Counseling and Planning, 17(2), 3–16.
Rosen, M. H., & Sade, O. (2017). Does financial regulation unintentionally ignore less privileged populations? Bank of israel research department. Jerusalem: Israel.
Schmeichel, B. J., Vohs, K. D., & Baumeister, R. F. (2003). Intellectual performance and ego depletion: Role of the self in logical reasoning and other information processing. Journal of Personality and Social Psychology, 85(1), 33.
Shah, A. K., Mullainathan, S., &Shafir, E. (2012). Some consequences of having too little. Science, 338(6107), 682–685.
Shalvi, S., Eldar, O., & Bereby-Meyer, Y. (2012). Honesty requires time (and lack of justifications). Psychological Science, 23(10), 1264–1270.
Shapiro, G. K., & Burchell, B. J. (2012). Measuring financial anxiety. Journal of Neuroscience, Psychology, and Economics, 5(2), 92.
Shefrin, H. M., & Thaler, R. H. (1988). The behavioral life-cycle hypothesis. Economic Inquiry, 26(4), 609–643.
Shefrin, H. M., & Thaler, R. H. (2004). Mental accounting, saving, and self-control. Advances in Behavioral Economics, 395–428.
Sherraden, M. S. (2013). Building blocks of financial capability. In J. Birkenmaier, J. Curley, & M. S. Sherraden (Eds.), Financial education and capability: Research, education, policy, and practice (pp. 3–44). Oxford, UK: Oxford University Press.
Sherraden, M. S., & Ansong, D. (2016). Financial literacy to financial capability: Building financial stability and security. In C. Aprea, E. Wuttke, K. Breuer, N. K. Koh, P. Davies, B. Greimel-Fuhrmann, & J. S. Lopus (Eds.), International handbook of financial literacy (pp. 83–96). Singapore, Singapore: Springer.
Simon, H. A. (1972). Theories of bounded rationality. Decision and Organization, 1(1), 161–176.
Stanovich, K. E., & West, R. F. (2000). Individual differences in reasoning: Implications for the rationality debate? Behavioral and Brain Sciences, 23(5), 645–665.
Thaler, R. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199–214.
Thaler, R., & Sunstein, C. (2008). Nudge: Improving decisions about health, wealth, and happiness. New Haven, CT: Yale University Press.
Thaler, R. H., & Shefrin, H. M. (1981). An economic theory of self-control. Journal of Political Economy, 89(2), 392–406.
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science (New York, N.Y.), 185(4157), 1124–1131.
Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science (New York, N.Y.), 211(4481), 453–458.
Van Raaij, W. F. (2016). Understanding consumer financial behavior: Money management in an age of financial illiteracy. New York, NY: Springer.
Van Rooij, M., Lusardi, A., & Alessie, R. (2011). Financial literacy and stock market participation. Journal of Financial Economics, 101(2), 449–472.
Vohs, K. D. (2013). Psychology. The poor’s poor mental power. Science (New York, N.Y.), 341(6149), 969–970.
Webb, T. L., Chang, B. P., & Benn, Y. (2013). ‘The ostrich problem’: Motivated avoidance or rejection of information about goal progress. Social and Personality Psychology Compass, 7(11), 794–807.
Willis, L. E. (2008). Against financial literacy education. Iowa Law Review, 94, 08–10.
Willis, L. E. (2011). The financial education fallacy. The American Economic Review, 101(3), 429–434.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2020 Springer Nature Switzerland AG
About this chapter
Cite this chapter
Carmel, E., Leiser, D., Spivak, A. (2020). The Arrested Deployment Model of Financial Literacy. In: Zaleskiewicz, T., Traczyk, J. (eds) Psychological Perspectives on Financial Decision Making. Springer, Cham. https://doi.org/10.1007/978-3-030-45500-2_5
Download citation
DOI: https://doi.org/10.1007/978-3-030-45500-2_5
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-45499-9
Online ISBN: 978-3-030-45500-2
eBook Packages: Behavioral Science and PsychologyBehavioral Science and Psychology (R0)