The objective of this study is to determine whether financial literacy is able to moderate the effects of self-control on financial outcomes. Financial literacy is an oft cited solution to the myriad financial complexities faced by consumers. If financial literacy is effective it should help consumers overcome issues of self-control to encourage more fiscally responsible behaviors. Both economic and psychological theories of self-control are explored, and a conceptual model using the Big Five personality trait of conscientiousness as a measure of self-control is utilized.
Data for this study come from the 1997 National Longitudinal Survey of Youth (NLSY) and the sample used in the study is comprised of 5,892 respondents. The measure of conscientiousness was collected in Round 13 as part of the Ten-Item Personality Inventory (TIPI). Financial literacy was assessed using three questions, collected in Round 11, on compounding interest, inflation, and stock risk. The five dependent variables modeled in this study are net worth, illiquid assets, liquid assets, credit card debt, and negative financial events. Multivariate linear and logistic regressions are used to analyze the data and an interaction term (financial literacy*conscientiousness) is used to test for moderating effects.
Aside from education, conscientiousness is the most consistent predictor of positive financial behaviors. Those scoring high in conscientiousness have more net worth, illiquid assets, and liquid assets. They also have lower credit card debt and are less likely to have experienced more than one negative financial event, such as the use of payday loans or late mortgage/rent payments. A one standard deviation increase in conscientiousness is correlated with a 35% increase in net worth, a 24% increase in illiquid asset holdings, a 33% increase in liquid asset holdings, and a 14% reduction in credit card balances. A one standard deviation increase in conscientiousness decreases the likelihood of experiencing one or more negative financial events by 21%.
Financial literacy is positively correlated with liquid and illiquid assets, though not associated with credit card debt, net worth, or negative financial events. A one standard deviation increase in financial literacy is correlated with a 27% increase in illiquid asset holdings and a 30% increase in liquid asset holdings. While financial literacy is not a significant predictor of net worth it is able to moderate the effect of conscientiousness on net worth. Likewise, financial literacy is able to moderate the effect of conscientiousness on illiquid assets. Financial literacy lessens the effect of conscientiousness on net worth, but strengthens its effect on illiquid assets.
These findings suggest that both conscientiousness and financial literacy are important and that a dual emphasis on increasing conscientiousness and financial literacy is likely to have a positive impact on consumer finances. Based on the findings, implications are drawn for the use of educators, financial planners, policy makers, and consumers. Alternative approaches to financial literacy are suggested as a means to encourage better financial behaviors of consumers. These alternatives include a number of policy-based approaches including information disclosure, educational programs, planned choice architecture, product/service design, and product/service regulation.