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Implications of behavioural economics for financial literacy and public policy

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  • Altman, Morris
Abstract
This paper summarizes and highlights different methodological approaches to behavioural economics in the context of the conventional economic wisdom and the implications of these different methodological approaches for financial literacy, related institutional change, and public policy. Conventional economics predicts no substantive improvement from improvements to financial literacy. The errors and biases approach to behavioural economics suggests limited improvements to decision making from financial education as errors and biases are largely hardwired in the brain. Government and expert intervention affecting individual choice behaviour is recommended. The evidence suggests that the bounded rationality approach to behavioural economics, with its focus on smart decision makers and the importance institutional and environment constraints on decision making, is the most promising lense through which to analyse financial decision making. From this perspective, financial decision making can be improved by providing decision makers with better quality information presented in a non-complex fashion, an institutional environment conducive to good decisions, an incentive structure that internalize externalities involved in financial decision making, and financial education that will facilitate making the best use of the information at hand within a specific decision-making environment.

Suggested Citation

  • Altman, Morris, 2012. "Implications of behavioural economics for financial literacy and public policy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(5), pages 677-690.
    • Handle: RePEc:eee:soceco:v:41:y:2012:i:5:p:677-690
    DOI: 10.1016/j.socec.2012.06.002
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    3. Nicolas Sirven & Thomas Barnay, 2017. "Expectations, loss aversion and retirement decisions in the context of the 2009 crisis in Europe," International Journal of Manpower, Emerald Group Publishing Limited, vol. 38(1), pages 25-44, April.
    4. Wolf, Marcus, 2018. "Ain't misbehaving: Behavioral economics and the making of financial literacy," economic sociology. perspectives and conversations, Max Planck Institute for the Study of Societies, vol. 19(2), pages 10-18.
    5. Geert Van Campenhout, 2015. "Revaluing the Role of Parents as Financial Socialization Agents in Youth Financial Literacy Programs," Journal of Consumer Affairs, Wiley Blackwell, vol. 49(1), pages 186-222, March.
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    8. Łukasz Kurowski, 2021. "Household’s Overindebtedness during the COVID-19 Crisis: The Role of Debt and Financial Literacy," Risks, MDPI, vol. 9(4), pages 1-19, March.
    9. Paramonovs Sergejs & Ijevleva Ksenija, 2015. "The Role of Marketing Tools in the Improvement of Consumers Financial Literacy," Economics and Business, Sciendo, vol. 27(1), pages 40-45, August.
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    11. Ester Muñoz-Céspedes & Raquel Ibar-Alonso & Sara de Lorenzo Ros, 2021. "Financial Literacy and Sustainable Consumer Behavior," Sustainability, MDPI, vol. 13(16), pages 1-21, August.
    12. Pitthan, Francisco & De Witte, Kristof, 2021. "Puzzles of insurance demand and its biases: A survey on the role of behavioural biases and financial literacy on insurance demand," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    13. Amari Mouna & Jarboui Anis & David McMillan, 2015. "The factors forming investor’s failure: Is financial literacy a matter? Viewing test by cognitive mapping technique," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1057923-105, December.
    14. García-Pérez-de-Lema, Domingo & Ruiz-Palomo, Daniel & Diéguez-Soto, Julio, 2021. "Analysing the roles of CEO's financial literacy and financial constraints on Spanish SMEs technological innovation," Technology in Society, Elsevier, vol. 64(C).
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    16. Shen, Chung-Hua & Lin, Shih-Jie & Tang, De-Piao & Hsiao, Yu-Jen, 2016. "The relationship between financial disputes and financial literacy," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 46-65.
    17. Tomasz Potocki, 2012. "Cumulative Prospect Theory as a model of economic rationality," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 31.
    18. Ebers, Axel & Thomsen, Stephan L., 2021. "How do warnings affect retail demand for Bitcoin? Evidence from an international survey experiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 32(C).
    19. Margherita Fort & Francesco Manaresi & Serena Trucchi, 2016. "Adult financial literacy and households’ financial assets: the role of bank information policies," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 31(88), pages 743-782.
    20. Cynthia Weiyi Cai, 2020. "Nudging the financial market? A review of the nudge theory," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3341-3365, December.
    21. Philip Kostov & Thankom Arun & Samuel Annim, 2014. "Financial Services to the Unbanked: the case of the Mzansi intervention in South Africa," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 8(2), June.

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    More about this item

    Keywords

    Financial literacy; Behavioural economics; Imperfect information; Heuristics; Trust; Nudging; Decision-making environment; Ecological rationality;
    All these keywords.

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • D00 - Microeconomics - - General - - - General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G2 - Financial Economics - - Financial Institutions and Services
    • K0 - Law and Economics - - General
    • P1 - Political Economy and Comparative Economic Systems - - Capitalist Economies

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