Financial literacy The working definition of financial literacy given by the
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and purchasing insurance. ii. Financial literacy reinforces behaviours such as timely payment of bills and avoidance of over-indebtedness which help consumers to maintain their access to loans
in tight credit markets. More financially literate consumers increase the demand for, and responsible use of, financial services, help to underpin financial market stability, and contribute to
wider economic growth and development. iii. Financial literacy is critical for promoting access to finance by creating incentives and environment that promote desired financial behaviors such
as saving, budgeting or using credit wisely. Financially savvy consumers are more likely to save their money, compare financial products and services and discuss money matters with their
families
Research interest on financial literacy has developed more than a decade ago in which research undertaken has mainly been conducted for developed countries such as in the United States of
America USA and the United Kingdom UK. Although there appears consensus regarding the importance of financial literacy especially on the economic development, empirical research on
financial literacy is limited Greenspan, 2001. In Australia, the first study measuring the financial literacy of Australians was conducted in 2004
by the Commonwealth Bank Foundation, in collaboration with universities and research
institutes. The Foundation commissioned research to investigate people’s ability to make informed and responsible financial decisions and analysed the relationship between financial
literacy and its impact on individuals. The research displayed a profile of those Australians with the lowest levels of financial literacy and demonstrated significant potential benefits for both
individuals and the economy from improved financial literacy. The results showed that i. Annual
personal and household income were related to financial literacy; ii.The higher a person’s financial literacy score, the higher their annual income; iii. Those with higher financial literacy
were significantly more likely to own a business; iv. The higher their financial literacy score, the more confident people were of their ability to raise 10 per cent of their annual income within a
week, boosting their ability to withstand sudden financial pressure and v. The lower financial literacy scores were directly related to respondents having been unable to pay their mobile phone,
utility and credit card bills in the last 10 years. Most of the studies on financial literacy levels not only provide evidence on the levels but look
beyond that to look for the factors that influence the levels. For instance, using US data, Hogarth 2002 explored the financial literacy of adults using 28 truefalse type questions on topics related
to personal finance. The study showed that, in general, less financially knowledgeable respondents were more likely to be single, relatively uneducated, relatively low income, minority,
and either young or old not middle aged. For Australian perspective, Beal and Delpachitra 2002 measured financial literacy of Australian students and found that university students were
neither skilled nor knowledgeable in financial matters. Beyond this level of financial literacy, they found that students with higher financial literacy scores were more likely to be male, have
greater work experience and have a higher income. Also study using Australian data, Worthington 2006 used logit regression models to predict financial literacy of Australian adults.
Results of the study suggests that financial literacy is found to be highest for persons aged between 50 and 60 years, professionals, business and farm owners. Financial literacy is lowest for
unemployed, females and those from non-English speaking background. Besides US and UK, significant economic importance of financial literacy has motivated research
to be examined for other countries including developed, developing countries and emerging markets for instance Australia, Korea, India, Indonesia and UAE. Using Korean data, Sohn et al
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2012 examined relationships between financial socialization agents, financial experiences, money attitudes, demographic characteristics, and the financial literacy of adolescents using the
2006 Korean National Financial literacy Test Survey for Adolescents. The findings yielded that those who chose media as their primary financial socialization agent, and those who had a bank
account, demonstrated higher levels of financial literacy. In addition, they found that those who regarded money as good or as a reward for efforts reported higher level of financial literacy than
those perceiving money in terms of avoidance or achievement. Students with mid-range monthly allowances showed higher level of financial literacy than the highest allowance group.
Focusing on financial literacy levels among investors, Al-Tamimi and Kalli 2009 assessed financial literacy for UAE investors and found that the financial literacy far from the needed
level. The financial literacy is found to be affected by income level, education level and workplace activity. In contrast for Indian investors of Hyderabad city, Agarwal et al. 2010
evaluated financial literacy online and the findings suggest that these investors are generally financially literate. They also discover that variations in financial literacy level were observed
across demographic and socio-economic groups. Differences in terms of demographic and socio- economic groups also has been observed by Volpe et al. 2002 who examined investment
literacy of 530 online investors for Australia. They found that level of investment literacy varied
with people’s education, experience, age, income and gender. Specifically, women had much lower investment literacy than men and older participants performed better than young
participants. These studies provide observation that financial literacy level among investors are mixed and the characteristics of the literacy also varies among countries and different
demographic and socio-economic factors. Several other studies have raised the suggestion that gender is a significant variable impacting on
the level of financial literacy Chen and Volpe, 2002. These findings suggest that women, in comparison to men, are more risk-averse and less confident when making financial decisions, and
are consequently less financially literate. Lack of confidence level may explain why men are more financially knowledgeable than women. By deduction, a lack of financial knowledge,
confidence and a reluctance to take risk a
re factors likely to impact on women’s financial ability. However, another possible reason for the lack of confidence and risk taking displayed by women
in financial skills may be due to their traditional role. Women, as part of society, undertake homemaker and carer duties. This role may be more significant in affecting their financial
decision makings. 2.2 Financial literacy and investment decisions
On the aspects of investment decisions, most of the theories used have been focusing on the traditional finance which includes portfolio allocation based on expected return and risk; risk-
based asset pricing models such as the CAPM and other similar frameworks; the pricing of contingent claims and the Miller-Modigliani theorem. These theories were all derived from
investor rationality and have been focussing on the corporate finance. The theory of behavioural finance has been introduced to overcome the limitations of the corporate finance theories in
explaining the personal finance behaviour such as in understanding the issues on why do individual investors trade, how do they perform and how do they choose their portfolios. Hence,
behavioural models are based on how people actually behave based on extensive experimental evidence, and could explain evidence better than traditional ones from the individual decision
making perspectives.
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Personal finance literatures have highlighted the significant impact of financial literatures on economic development for instance through the effects of financial illiteracy on financial decision
making Marcolin and Abraham, 2006; Lusardi Mitchell, 2005, 2007. Given the complexity of current financial instruments and the financial decisions required in everyday life, such as
comparing different financial instrument to invest, deciding how much to save, when and where to invest, when and where to get the financing, individuals need to know how to read and write
financially. Furthermore, the needs for financial literacy have become increasingly significant with the deregulation of financial markets and the easier access to credit; the rapid growth in
marketing financial products and the Government’s encouragement for its citizens to take more self-responsibility for their investment and retirement incomes Marcolin Abraham, 2006;
Binswanger Carman, 2012. Ignorance about basic financial concepts can be linked to lack of retirement planning, lack of participation in the stock market, poor borrowing behavior and also
as a determinant of excessive borrowing or attaining high-cost mortgages. Hence, the cost of poor financial decision-making and planning often gets shifted to other members of the community,
state and nation through higher prices for financial products and diversion of economic resources. On these issues, individual with less financial knowledge had more negative opinions about
finances and made more incorrect financial decisions. On similar ground, other studies found that many individuals who lack financial literacy have been deterred from embracing innovative
financial products, making sound financial planning decisions as well as giving serious consideration and commitment to their financial plans. The findings, thus, suggest that acquiring
a low level of financial knowledge limits their ability to make informed decisions. Alleyne and Broome 2010 have examined the investment decisions among students using the
theory of planned behaviour and risk propensity among future investors. Based on this theory as a significant predictor of investment intentions, the findings show that attitudes and referent groups
peers, family and significant others and beliefs about potential obstacles and opportunities significantly predict intentions to invest. They also found that the influence of friends and
relatives, and easy access to funds are significant predictors of investment intentions of students. Previous studies have also documented that gender and age has some implication on investment
decisions. For instance Schmidt Sevak, 2006 describes how household wealth in the United
States varies by gender and family type. They found that women’s investment has historically been lower than men’s for several reasons, including social and various demographic concerns.
Their study shows that large differences is documented in observed wealth between single- female-headed households and married couples. The wealth holdings of single females in the US,
controlling for characteristics such as income and education, are also significantly lower than the wealth holdings of single males In contrast, observed wealth gaps between genders in a sub-
sample of young households disappear when controlling for observable characteristics, suggesting either that in the US these gaps are disappearing for younger households or that these
gaps do not emerge until later in life. For lesser developed countries, Cole et al. 2008 examine financial literacy level, its
determinants and the effect of financial literacy on the demand for financial services using data from India and Indonesia. Strong relationship between financial literacy and financial behaviour
is observed and the study also demonstrates that financial literacy is an important correlate of household financial behaviour and household wellbeing.
Previous studies have examined the impact of financial literacy on different types of investment decisions such as retirement Yoong et al 2012, Almenberg Soderbergh, 2011; Klapper
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Panos, 2011; Lusardi Mitchell, 2011; Dvorak Hanley, 2010 and stock market investment Van Rooij et al., 2011. Almenberg and Soderbergh 2011 examined the relationship between
financial literacy and retirement planning of Swedish adults. Financial literacy levels were found lower among older people, women and those with low education or earnings. For Rusia, Klapper
and Panos 2011 found that higher literacy is positively related to retirement planning and investigating in private pension funds. The influence of financial literacy on retirement planning
in the United States, focusing on the extent to which Americans were equipped to make decisions in the pension and financial landscape and whether they were sufficiently knowledgeable about
economics and finance to plan for retirement were anayled by Lusardi Mitchell 2011. The study used the new National Financial Capability Study based on U.S. dataset, known as the 2009
National Survey on 1,488 American adults. The findings showed problems with the current state of financial knowledge in the United States in which many respondents lacked the key knowledge
of critical financial concepts including interest compounding, inflation, and risk diversification and failed to plan for retirement, even when retirement was close at hand, only 5-10 years off.
The reason was attributed to debt illiteracy which refers to respo
ndents’ lack of knowledge about the workings of credit cards and interest compounding, which could justify the relationship
between financial illiteracy and the lower retirement wealth accumulation. Financial literacy was also found particularly low among the young, women, and the less-educated, older individuals. In
addition, the study also linked illiteracy problems with different ethnicity in which Hispanics and African-Americans scored the least well on financial literacy concepts. However, all groups rated
themselves as rather well-informed about financial matters, not withstanding their actual performance on the key literacy questions. They also showed that people who scored higher on
the financial literacy questions were also much more likely to plan for retirement, which is likely to provide them a better life for old-age. Also study using US data, Dvorak and Hanley 2010
found that participants demonstrated a fairly good knowledge of the basic mechanics of the plan, but were unable to distinguish a variety of investment options. Analysing various investment
options such as short-term versus long-term bonds, growth versus value, index versus managed, they were able to compare the current higher levels of knowledge than previously examined. In
terms of demographic factors, women, low income and low educated employees demontrated low score on knowledge.However, personal contributions were shown to lead to more knowledge.
These results enhanced plan designs which consist few investment options and encourage personal contributions. For Malaysia, Yoong et al 2012 examined financial literacy and
retirement planning. The first study analysed the impact of financial learning on retirees’ retirement financial planning preparation. The results found that there was a significant
relationship between financial learning and behavioral assessment of personal finance. In addition, the study also detected the impact of age differential in which the older age groups 50
years influenced the relationship between financial learning and subjective perception of satisfaction with personal finance.
For stock market investment, Van Rooj et al 2011 devised two special modules for De Nederlandsche Bank DNB Household Survey to measure financial literacy and study their links
to stock market participation. They found that the majority of respondents demonstrated a basic financial knowledge and had some grasp of concepts such as interest compounding, inflation, and
the time value of money. However, many respondents could not distinguish between bonds and stocks, the link between bond prices and interest rates, and the basics of risk diversification. They
concluded that financial literacy influenced financial decision-making in which those with low literacy were much less likely to invest in stocks.