What Behavioural Economics Has to Say about Financial Literacy
Gaps in financial literacy are arguably responsible for significant errors in decision-making
by consumers and investors alike. Unlike the conventional neoclassical economic wisdom,
behavioral economics opens the analytical door to the significance of financial literacy for
decision-making. This paper presents evidence on the importance of financial literacy as well
presenting the different analytical approaches to financial literacy that flow from neoclassical
economics and from the different methodological approaches to behavioral economics.
Of particular importance is the errors and biases approach, which attributes much of
financial illiteracy to the cognitive shortcomings of the human brain. Whereas the bounded
rationality approach focuses on informational gaps (complex and asymmetric information),
framing effects, institutional design problems, and human capital deficits (inclusive of
experiential learning), as key to understanding documented gaps in financial literacy.
The behavioral approaches have significant implications for analyses and public policy.
Copyright (c) 2016 Morris Altman
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