The link between financial confidence and outcomes (Canada)

1. Context
2. The study
3. Key findings
4. Points to consider

Context

The complexity and variety financial products and services available means that people need to develop financial literacy (the skills, knowledge and confidence to make good decisions) if they are to achieve their financial goals. People of working age face particular challenges as they have to manage their day-to-day finances as well as plan for the future. However, evidence from a recent financial capability survey suggests that many working-age Canadians may lack the financial knowledge they need. In addition, there is growing evidence that financial outcomes are linked not only to financial knowledge, but to psychological states such as efficacy and self-control and to the influence of cognitive biases that can lead to systematic errors. This paper, commissioned by the Financial Consumer Agency of Canada, focuses on the role of financial confidence and the relationship between confidence, knowledge and outcomes.

The study

The objectives of the research are the following:

1. To analyse Statistics Canada’s 2014 Canadian Financial Capability Survey (CFCS), to understand what determines a range of financial outcome measures
2. To examine the relationship between financial knowledge and financial confidence and look at how discrepancies relate to financial outcomes.

Through a review of the literature relating to financial literacy and confidence, the authors generate the following research questions:

• To what extent are financial confidence and financial knowledge linked with financial behaviour and well-being among working-aged adults?
• To what extent are there discrepancies between financial confidence and financial knowledge (e.g., high confidence/low knowledge; low confidence/high knowledge), and what characteristics are associated with these discrepancies?
• How are discrepancies between financial confidence and financial knowledge linked with financial behaviour and well-being among working-aged adults? For example, do high levels of confidence lead to positive outcomes, even if knowledge is low? Are high levels of knowledge undermined by low confidence?

The CFCS study captures measures of each respondent’s financial knowledge, assessment of their own financial confidence, and data on a range of financial outcomes and behaviour. The authors conducted two separate forms of analysis, primarily on a subset of the CFCS based on working age adults, aged 25-64 (although they did also include some comparisons with other groups such as young adults aged 18-24).

• Descriptive analysis: This created four groups of respondents based on their financial confidence (high or low) and their financial knowledge (high or low).
• Multivariate analysis: This analysis controlled for demographic factors and plotted the impacts of confidence, knowledge, and the interaction of the two on a variety of financial outcomes.

Key findings

• Many Canadians have low scores in either an objective assessment of financial knowledge, a subjective assessment of financial confidence, or both - indicating there are substantial gaps to be filled.
• Financial confidence is a better predictor than financial knowledge in shaping behaviour and outcomes related to day-to-day money and debt management. Findings suggest that learning-by-doing may be key.
• Financial confidence is also important in understanding many planning and saving outcomes, but can be undermined by poor knowledge (over-confidence). Implications for research, policy and interventions:
• Such programmes should be informed by a better understanding of the psychological factors and cognitive biases influencing behaviour and the prevalence of such biases amongst different groups
• In particular, programmes should take account of the effects of over-confidence on planning and saving.
• Insights could be gained by carrying out direct measurement of these biases using controlled experiments.

Summary: Overall, the research shows that financial confidence and knowledge are linked with financial outcomes in a variety of ways. This means that interventions must be designed with a better knowledge of how these factors interplay, and must also be tailored to the specific needs of those with particular gaps in confidence, knowledge or both.

Points to consider

• Methodological limitations: It is not possible to evaluate the data collection methodology as the Few details are given.
• Relevance: Understanding the relationship between financial confidence and financial knowledge is highly relevant given the impact of confidence on financial capability that is evident from many studies, including those referenced in the review section of this paper.
• Generalisability/ transferability: The findings of this study of working age Canadians are likely to be transferrable to working age populations in other developed nations.
• Applicability: This paper is applicable to anyone with an interest in financial capability such as government, support agencies, policy makers, regulators, educators and financial institutions.

Full report

The link between financial confidence and outcomes - full report