Date of Publication

5-11-2012

Degree Type

Honors Thesis

Department

Business Administration and Economics

First Advisor

James Cordeiro, PhD

Abstract

Financial literacy is a measure of an individual’s knowledge of financial concepts and their ability to use that knowledge to make critical decisions in the money management process.

Literacy rates in America, as measured by behavioral indicators, are staggeringly low. Rates among teens and young adults have steadily declined over time and reached an all‐time low in 2008 as recorded by a national survey by the Jump$tart® Coalition for Personal Financial Literacy. Financial illiteracy, or the lack of financial knowledge, places an individual at a disadvantage in the American financial system when interacting with other economic agents, potentially leading to a lifetime of financial hardship. The consequences of the imbalance of power between consumers and service providers can be seen on a macroeconomic scale in the recent financial crisis.

49‐question survey was administered to 51 participants in order to assess both the current financial literacy and the current decision‐making capacity of undergraduate students. In addition, students were also assigned behavioral scores based on their financial habits over the last twelve months, and the relationships between behavior, decision‐making ability, and financial literacy were explored.

The results of the assessments were poor. Twenty‐nine students received a passing behavioral score of 60 out of 100 or higher with an average score of 62.1 percent. Only twenty‐six respondents received a passing literacy score of 60 out of 100 or higher with the mean test score at 55.9 percent. Thirty‐one respondents received a passing decision making score of five out of eight or higher. The sample correlation coefficient between the financial literacy and financial decision‐making scores was 0.474, suggesting a direct relationship between the two variables. So, as financial literacy increases, so does the capacity to make good financial decisions.

Major obstacles to widespread financial literacy are a profound lack of basic technical and emotional skills, an inherent conflict of interest between financial service providers and their clients, and an increasingly complex financial system. A powerful way to overcome these obstacles and level the playing field between consumers and professionals is to mandate financial education in schools. By pooling federal, State, and private resources, it is possible to mend this gap in education and secure a more prosperous and well‐informed future.

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