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Subjective and objective financial literacy, opinion leadership, and the use of
retail banking services
Mohammad G. Nejad, Katayon Javid,
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To cite this document:
Mohammad G. Nejad, Katayon Javid, (2018) "Subjective and objective financial literacy, opinion
leadership, and the use of retail banking services", International Journal of Bank Marketing, https://
doi.org/10.1108/IJBM-07-2017-0153
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Subjective and
Subjective and objective financial objective
literacy, opinion leadership, and financial
literacy
the use of retail banking services
Mohammad G. Nejad
Fordham University, New York, New York, USA, and
Received 25 July 2017
Katayon Javid Revised 7 November 2017
Accepted 13 December 2017
USI Insurance Services, White Plains, New York, USA
Abstract
Purpose – The purpose of this paper is to explore the relationship between consumers’ subjective and
objective financial literacy (OFL) – the necessary knowledge and skills to make effective personal financial
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decisions – and their effects on opinion leadership and the use of retail financial services.
Design/methodology/approach – In total, 486 US participants were surveyed. The demographical profile
of the sample roughly resembled that of the USA population.
Findings – On average, consumers with moderate levels of OFL report lower subjective financial literacy
(SFL) compared to those with low or high levels of OFL. Moreover, while SFL and opinion leadership are
positively correlated, consumers with moderate levels of OFL reported lower opinion leadership compared to
those with high or low levels of OFL. The paper introduces financial literacy miscalibration as the
discrepancy between consumers’ objective and SFL. Financially illiterate respondents who perceived
themselves as financially knowledgeable reported high opinion leadership. Finally, a greater percentage of
financially – literate consumers reported owning checking and savings accounts, using online and mobile
banking for diverse purposes, and making fewer phone calls to customer services, compared to others.
Research limitations/implications – The paper integrates literature from financial literacy, consumer
knowledge, and opinion leadership to explain these findings and to further enhance our theoretical and
empirical understanding of objective vs SFL.
Practical implications – The discrepancies between objective and SFL may significantly influence
consumers’ financial decisions and the degree to which they expose themselves to the pertinent risks.
The paper discusses implications for public policy makers as well as marketing managers and researchers.
Originality/value – The study is the first to empirically explore the research questions following the
conceptual development.
Keywords Opinion leadership, Financial literacy, Consumer subjective and objective knowledge,
Financial literacy miscalibration
Paper type Research paper
Introduction
Consumers make various financial decisions on a regular basis. Every exchange or
purchase decision entails a financial aspect which may include evaluating affordability and
comparing the associated costs among alternative choices. For example, shopping for an
automobile includes a decision on the brand and model, new or used car, and leasing
compared to purchasing. It also entails different financing options such as the interest rates,
fees, terms, and the payments. The more financially savvy customers may also consider
expenses associated with maintenance, repairs, and fuel in addition to the future resale
value of the car. These decisions significantly affect the total cost of car ownership.
However, consumers often make poor financial decisions that jeopardize the financial
well-being of themselves and their families. Many consumers do not save enough for
retirement and consumer and student debt has reached unprecedented levels (Mitchell and
Lusardi, 2015; Morrin et al., 2012; US Courts, 2016; Wolff-Mann, 2016).
International Journal of Bank
Marketing
This research was supported by the Gabelli School of Business, Fordham University. The authors © Emerald Publishing Limited
0265-2323
thank Kristina Cordi for her research assistance. DOI 10.1108/IJBM-07-2017-0153
IJBM This study focuses on consumer financial literacy as a critical factor that influences
consumers’ financial decisions. Financial literacy is the fundamental knowledge and skills that
capture one’s ability to make informed and effective personal financial and economic decisions
by understanding how money works (Lusardi and Mitchell, 2007; Starček and Trunk, 2013).
Previous research has differentiated between objective financial literacy (what one actually
knows, hereafter referred to as OFL) and subjective financial literacy – one’s perceptions of his/
her own financial literacy, hereafter referred to as SFL. The degree to which consumers believe
that they are able to make the right financial decision influences their financial decisions and
their perceptions of the relevant risks. So, SFL determines consumers’ approaches to making
personal financial decisions. OFL, however, affects the outcome of one’s financial decisions.
Financially literate consumers are expected to make better personal financial decisions. Those
with higher levels of OFL are less likely to engage in risky investments while those with higher
SFL are more susceptible to such investments (Hadar et al., 2013).
OFL and SFL should also lead to different behaviors including giving advice to others
and the use of financial services. Individuals often influence each other’s decisions in
various financial matters. Opinion leadership and one’s knowledge and expertise are two
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different individual attributes, even though the two are often correlated (Nejad et al., 2014).
In the context of financial decisions, it is important to understand the relationship between
OFL and SFL on the one hand and opinion leadership on the other hand. Financial advice by
those with low OFL may have adverse outcomes. Moreover, financial institutions need to
understand how consumers’ OFL may affect use of their services such as owning checking
and savings bank accounts and alternative ways of banking services such as through
mobile, online, phone, or branch.
Understanding the discrepancies between one’s OFL and SFL is critical to understanding
consumers’ financial decisions. This study compares and contrasts OFL and SFL and the
discrepancies between them by exploring the following three research questions:
RQ1. What is the relationship between OFL and SFL?
RQ2. What is the relationship between OFL and SFL on one hand and opinion leadership
on the other hand?
RQ3. How does the OFL affect consumers’ use of personal banking services?
The research questions were explored through a survey of 486 participants recruited from a
national panel of US consumers. The analysis found that, on average, consumers with
moderate levels of OFL expressed lower SFL and opinion leadership compared to those with
low or high levels of OFL. SFL and opinion leadership, however, were positively correlated.
Moreover, consumers who overestimated their financial literacy demonstrated higher
degrees of opinion leadership. Finally, a higher percentage of financially literate consumers
(those with high OFL) own checking or savings accounts, use online and mobile banking for
more diverse purposes, and contact customer service less frequently compared to those with
lower OFL. The findings of this study offer new perspectives on how public policy makers,
managers, and researchers can combat issues related to consumer financial behaviors.
The next section expands on consumer OFL and SFL, followed by the conceptual
development that supports the hypotheses. The paper continues with the methodology and
the results. The final section discusses implications and directions for future research.
he/she knows (Hadar et al., 2013). OFL and SFL relate to the literature on consumer
objective and subjective knowledge (Alba and Hutchinson, 2000).
Previous research findings have been inconsistent regarding the relationship between
consumer objective and subjective knowledge. The findings vary from insignificant or weak
correlations (r ¼ 0.08, 0.15) for pro-ecological behavior (Ellen, 1994) and medical services
(Duhan et al., 1997) to stronger correlations (r ¼ 0.54) for sewing machines (Brucks, 1985).
Only one recent study has reported the correlation between SFL and OFL, r ¼ 0.14
(Tang and Baker, 2016). A meta-analysis found an average correlation of 0.37 across studies
(Carlson et al., 2009). By including moderating variables, the authors were able to
accomplish a correlation of 0.84. Given the challenges of measuring objective knowledge,
Carlson et al. (2009) suggested that researchers may use subjective knowledge instead of
objective knowledge.
Researchers have measured alternative conceptualizations of consumer knowledge when
examining the relationship between consumer knowledge and other variables such as
opinion leadership. They have used subjective knowledge, product ownership, brand
awareness, visiting stores, and reading relevant publications such as magazines (e.g. Coulter
et al., 2002; Midgley and Dowling, 1993). These are proxies for objective knowledge which
may or may not reflect one’s actual objective knowledge. Previous studies often discuss the
relationship between consumer knowledge and opinion leadership without considering
the differences between alternative conceptualizations of consumer knowledge. This may
be because measuring consumer objective knowledge is often challenging or since
researchers have simply ignored the differences between subjective and objective
knowledge (Nejad et al., 2014).
In the area of financial literacy, using objective and subjective knowledge (i.e. OFL and
SFL) interchangeably can be misleading as OFL and SFL lead to distinct behavioral
outcomes. For example, investors with a higher degree of subjective knowledge of
investment products trade more often, more diversely, and more internationally compared
to others (Graham et al., 2009). Consumer SFL has a stronger effect on credit card debt than
OFL, but OFL negatively influences risky borrowing behavior (Xiao et al., 2011). Moreover,
consumers’ subjective knowledge about investment products leads to more risky
investment approaches. Consumer objective knowledge, however, negatively affects the
likelihood of investing in general, and more specifically, taking risky investment
approaches. This is due to the fact that objective knowledge highlights what one does not
know and reveals the true risks involved in decisions (Hadar et al., 2013), while subjective
knowledge is closely related to one’s previous experiences and confidence in making the
IJBM right decisions (Alba and Hutchinson, 2000). The fact that OFL and SFL have different
effects on one’s decisions is in line with the “competence hypothesis” which suggests when
two events have equally probable outcomes, individuals prefer to invest in the one that they
perceive themselves as knowledgeable rather than the one in which they feel uninformed
(Hadar et al., 2013; Heath and Tversky, 1991).
Despite the importance of understanding the relationship between consumer OFL and
SFL, research is meager in this area. Babiarz and Robb (2014) found that both OFL and SFL
positively influence the accumulation of emergency saving funds and seeking financial
advices (Babiarz and Robb, 2014; Robb et al., 2012). Hadar et al. (2013), however, found that
the consumers with higher SFL are more likely to engage in risky financial behavior while
OFL does not show this effect. With the exception of one study that was conducted in China
(Tang and Baker, 2016), previous studies on OFL and SFL have primarily explored the
relationship between the two on one hand and various consumer financial behaviors on
the other hand and not the relationship between OFL and SFL. This study explores the
relationship between OFL and SFL and the effects they have on consumer attitudes and
behaviors. The study also proposes financial literacy miscalibration – the discrepancy
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Conceptual background
SFL and OFL
Every purchase decision (i.e. exchange) entails two areas of consideration – the product or
service and the financial aspects. The primary objective of every exchange is obtaining a
product or a service that fulfills consumer needs and/or wants. When evaluating the
financial aspects, consumers primarily focus on the price and affordability and not
necessarily whether their financial choices were optimal. When the financial aspect of a
decision is complex or entails multiple components, a thorough evaluation of the decision
requires one to establish and compare the outcomes of different choices with each other.
This is often infeasible, so consumers may never learn whether they made the optimal
decision. Since it is often challenging or impossible to compare alternative financial choices,
consumers rely on evaluating their experience with products or services post-purchase and
whether they were able to make the payments. Meanwhile, consumers frequently engage in
purchasing decisions, so they feel more or less familiar with the financial aspects of
purchases. Hence, they remain unaware of their real ability in making optimal financial
decisions. Thus, their perceptive financial literacy or SFL may be misaligned with their
actual financial literacy or their OFL.
A recent meta-analysis on the complex relationship between consumers subjective and
objective knowledge (Carlson et al., 2009) highlights several key findings: hedonic goods are
often more involving and associated with higher prices compared to utilitarian goods.
Thus, subjective and objective knowledge have a stronger relationship for hedonic goods
than for utilitarian ones. Moreover, it is easier for consumers to learn about products than
non-products, so subjective and objective knowledge exhibit a weaker relationship for
services compared to products. Finally, search attributes may be evaluated before a
purchase while evaluating experience attributes will only be possible post-consumption.
Hence, the relationship between subjective and objective knowledge is weaker for
experience attributes than for search attributes. Financial literacy relates to the utilitarian
aspects such as an investment or financing a purchase which often entails experience
attributes such as a mutual fund’s performance. These evidences suggest that OFL and
SFL are conceptually different and should be weakly correlated.
While previous studies have primarily focused on the correlation between subjective and
objective knowledge, there are reasons to believe that the two may exhibit a more complex
relationship. Brucks (1985) found that knowledgeable consumers are more efficient in their
information search, they ask more questions, and the questions they ask are more relevant Subjective and
when making a purchasing decision. This goes along with Miyake and Norman’s (1979) title objective
that “to ask a question, one must know enough to know what is not known.” financial
Unknowledgeable consumers are unable to distinguish the “dimensional categories” of a
product’s functionality (Park and Lessig, 1981). Consequently, such consumers remain literacy
unaware of what they do not know. Knowledgeable consumers, however, search more
efficiently and look for more relevant attributes. For example, when searching for an
automobile, they look for fuel efficiency measures such as miles-per-gallon rather than fuel
range – the distance a car can travel with a full tank of fuel ( Johnson and Russo, 1984).
Consumers with moderate product familiarity feel less confident in relying on cues such as
the price and brand compared to those with high or low product familiarity and hence takes
more time to make their decisions (Park and Lessig, 1981). The less-knowledgeable
consumers are over-confident and consumers with moderate knowledge are
under-confident. This is due to the fact that consumers with a moderate degree of
product familiarity have some knowledge which helps them gain some information about
the purchase and know that there is a lot that they may not know (Park and Lessig, 1981).
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While consumers frequently make financial decisions, they primarily focus on whether
they can afford the purchase or service and not necessarily whether the decision is optimal
from a financial perspective. This may even happen in the case of high-involvement
decisions. For example, someone who leases a car will consider whether he/she can afford
the down payment and the monthly payments and perhaps how these payments may affect
his/her other personal finances. The consumer may never evaluate the long-term total cost
of car ownership. Evaluating the decision post-purchase may primarily entail the experience
post-purchase rather than whether the financial aspects were optimal, especially compared
to other options.
Consumers with higher OFL are more likely to thoroughly evaluate the financial aspects
of their decisions (Mitchell and Lusardi, 2015). Their financial skills may improve over time
as they make more decisions and evaluate the outcomes over time which leads to a more
accurate understanding of their financial literacy (i.e. SFL). Those with low OFL, however,
do not possess the skills to evaluate the financial aspects of their decisions and may
primarily focus on their experiences with products or services. As long as they can afford
the payments, they may simply feel good about their purchase decision (including the
financial aspects) leading to higher SFL. Those with moderate levels of OFL, however, are
more likely to evaluate the financial aspects of their past decisions and learn the limitations
of their capabilities. Therefore, we propose the following hypothesis:
H1. Consumers with moderate degrees of OFL report lower SFL compared to those with
lower or higher levels of OFL.
discrepancies between SFL and OFL. Financial literacy miscalibration captures a consumer’s
misperceptions about his/her financial abilities. Those with a positive miscalibration
(i.e. overestimate their financial literacy) are more prone to making financial mistakes.
However, consumers who have negative miscalibration underestimate their financial literacy
and are reluctant to take advantage of opportunities. For example, they may avoid reasonable
risks in choosing retirement investments that offer a greater potential for long-term returns.
Consumer confidence regarding their knowledge is strongly correlated with “upward
distortion” of memory. The more consumers are confident about the accuracy of their
memory, the more over positively they misremember past events. In other words, the more
consumers think that they are right, the more likely that they are wrong (Alba and
Hutchinson, 2000; Holmes et al., 1998). Similarly, Mitchell and Lusardi (2015) found that
many consumers who had strong confidence in their answers to financial literacy questions
were actually wrong.
H1 speculates that consumers with a moderate level of OFL are likely to have low SFL
and hence, a negative financial literacy miscalibration (i.e. SFLoOFL). H2a predicts a
positive relationship between SFL and opinion leadership. H2b speculates that
consumers with moderate degrees of OFL report lower opinion leadership than others.
Thus, consumers with negative financial literacy miscalibration demonstrate low opinion
leadership. Similarly, H1 suggests that consumers with low OFL, on average, have high SFL
and hence, high financial literacy miscalibration (i.e. SFL WOFL). According to H2a and
H2b, such consumers have a high degree of opinion leadership. H1 suggests that consumers
with high OFL are likely to have high SFL which leads to low to moderate degree of
financial literacy miscalibration (SFL and OFL are both high) and according to H2a and
H2b, they will have high opinion leadership. Hence, the following hypothesis is advanced:
H3. Consumers who have a positive financial literacy miscalibration exhibit greater
opinion leadership. Those with negative miscalibration of their financial literacy
demonstrate low opinion leadership.
Behavioral outcomes
Previous studies have explored the effect of consumers’ OFL and SFL on their personal
financial decisions and behaviors (e.g. Hadar et al., 2013; Lusardi and Mitchell, 2007;
Lusardi and Tufano, 2015; Morrin et al., 2012). This study expands this research by focusing
on consumer behaviors with regards to retail banking, an area that has important
managerial implications for retail financial services and banking.
Unserved and underserved consumers represent a critical issue and a high priority for Subjective and
the financial industry, the well-being of society, and the global economy (Nejad, 2016; objective
Scott et al., 2011). For example, about 11 percent of Americans are disconnected from the financial
mainstream financial system because neither they nor their spouses have a bank account
and another 17 percent use alternative services such as payroll cards or pawn shops literacy
(Federal Deposit Insurance Corporation, 2014; Federal Reserve, 2014). On average,
financially literate consumers plan and handle their personal finances better than those with
low OFL (Lusardi and Mitchell, 2007; Lusardi and Tufano, 2015). Possession of a bank
account connects one to the mainstream financial system, which is the first step in handling
personal finances effectively. Thus, a higher percentage of financially literate consumers
should own checking and/or savings accounts compared to others:
H4a. Financially literate consumers are more likely to own saving and/or checking
accounts than those with low OFL.
Financially literate consumers possess strong numeric and cognitive skills which may
motivate them to process information, learn new skills, and search for what is available in
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the market (Lusardi, 2012; Mitchell and Lusardi, 2015). These characteristics are essential
for using new services such as online and mobile banking. Not only are financially literate
consumers more likely to use a service (e.g. online or mobile banking), but they may also use
the services for more diverse purposes (e.g. checking balance, transactions, paying bills,
transferring funds, depositing checks, etc.). Due to their reliance on cognitive skills,
financially literate consumers are more likely to resolve issues without needing to contact
customer service. The following hypotheses summarize this discussion:
H4b. A higher percentage of financially literate consumers use online and mobile
banking than less financially literate consumers.
H4c. Consumers with higher OFL are more likely to use online and mobile banking for
diverse purposes than those with lower degrees of OFL.
H4d. Financially literate consumers are more likely to resolve their financial issues on
their own and hence contact customer services less than those with lower OFL.
Method
Data
A third-party research firm collected the data for this study by surveying a sample recruited
from a national panel of consumers residing in the USA. After data cleaning and screening
for participants’ attention, the final data set comprised 486 usable survey responses.
The demographical profile of the sample roughly resembled that of the USA population
(www.census.gov). The composition of the sample in terms of ethnicity was as follows:
Caucasian (64 percent), African American (13 percent), Hispanic (14 percent), Asian
(7 percent), and others (2 percent). The sample consisted of 49 percent male and 51 percent
female respondents. Approximately 19 percent of the participants had not completed high
school, 44 percent had a high school diploma, 14 percent had completed some college or an
associate degree, 18 percent had bachelor’s degree, 4 percent held master’s degree, and
0.6 percent had earned a doctorate degree. About 7 percent of the respondents were between
18 and 24 years old, 18 percent reported an age between 25 and 34 years old, 21 percent were
in the 35-44 years age bracket, 20 percent were between 45 and 54 years old, 23 percent
were in the 55-64 years age bracket, and 11 percent were 65 years or older. With regards to
income, 24 percent reported an annual combined family income of less than $25,000,
31 percent were in the bracket of $25,000-$49,999, 24 percent were in the range of $50,000-
$74,999, 12 percent were between $75,000 and $99,999, 7 percent were between $100,000 and
IJBM $149,999, and 2 percent reported an annual combined family income of $150,000 or more.
The respondents’ self-reported job titles were diverse including driver, retail clerk/cashier,
waitress, administrative assistant, nurse, paralegal, technician, IT specialist, software
developer, accountant, product analyst, business owner, billing manager, manager/director
(IT, tax, project, etc.), scientist, and teacher among others.
Measures
The questionnaire was prepared after a careful review of the literature on financial literacy,
consumer knowledge, and opinion leadership. Following a pretest of the initial questionnaire
with students, minor changes were made to the wording of some questions and new questions
were added. The questionnaire first asked participants about their self-perceptions such
as SFL and opinion leadership followed by questions regarding OFL. The order of questions
was important because respondents’ self-perceptions may be influenced by the types of
questions asked. For example, Hadar et al. (2013) manipulated respondents’ SFL by asking
them easy or difficult questions. Opinion leadership and SFL were measured first (before OFL)
using three items each eliciting seven-point scales (see Table I). SFL was measured using three
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items adopted from Flynn and Goldsmith (1999) and modified to the context of financial
literacy (Morrin et al., 2012). Opinion leadership was measured using three items adopted from
Flynn et al. (1996), and modified for the purpose of this study.
OFL was measured using six questions (see Table II) that were adopted from the financial
literacy literature (Hadar et al., 2013; Lusardi, 2012, 2015; Lusardi and Mitchell, 2007;
Mitchell and Lusardi, 2015). The number of correct answers represented each respondent’s
OFL. Those who answered zero questions correctly received a score of 0 (low OFL) while
those who answered all questions correctly received a perfect score of 6 (high OFL).
Subjective Opinion
Multi-item scales and individual scale itemsb knowledge leadership
Table II.
Measurement
questions for
financial literacy
A one-way ANOVA on OFL with SFL as the dependent variable demonstrated that OFL
(F(5, 480) ¼ 7.60, p o0.001) has a significant effect on SFL (see Figure 1). Due to unequal cell
sizes, Type III Sum of Squares was used. Post-hoc analysis using Tukey’s significance
difference test and Games-Howell test found that respondents with the highest OFL (those
who answered five or six questions correctly) reported the highest degree of SFL (M5 ¼ 5.02,
M6 ¼ 5.03). Following this group was the group with the lowest degree of OFL (M0, 1 ¼ 4.65)
and the next highest OFL group – those who answered four questions correctly (M4 ¼ 4.48).
6.00
5.02 5.03
Subjective Financial Literacy
3.00
2.00
1.00
0.00
1 2 3 4 5 6 Figure 1.
Objective Financial Literacy – Total Number of Correct Answers
Subjective vs objective
financial literacy
Note: Group 1 includes those who answered 0 or 1 questions correctly
IJBM Groups who achieved moderate degrees of OFL – provided two or three correct
answers – reported the lowest SFL (M2 ¼ 4.03, M3 ¼ 4.19). The results support H1.
Moreover, the group with the highest OFL reported higher SFL than those with the
lowest OFL. The results support H1.
H2a suggests that consumers with moderate degrees of OFL exhibit lower opinion
leadership compared to those with high or low degrees of OFL. H2b speculates that SFL and
opinion leadership are positively correlated. As Table III and panel A in Figure 2 display,
the correlation between SFL and opinion leadership is positive (r ¼ 0.33, p o0.001), hence
supporting H2b. The correlation between OFL and opinion leadership, however, is
insignificant (r ¼ 0.002, see Table III). As panel B of Figure 2 displays, the groups with the
lowest OFL reported the highest degree of opinion leadership (M1 ¼ 3.6) followed by groups
with high OFL (M5 ¼ 3.44, M6 ¼ 3.32). The groups with moderate OFL reported the lowest
degree of opinion leadership (M2 ¼ 3.17, M3 ¼ 3.19, and M4 ¼ 2.94). The differences across
groups in terms of opinion leadership were statistically supported through an ANOVA
(F(6, 480) ¼ 337.28, po 0.001). These results collectively support H2a suggesting significant
differences between the relationships of OFL and SFL with opinion leadership.
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3.50 3.16
3.04 3.05
3.00
2.50
2.00 1.71
1.50
1.00
0.50
0.00
2 3 4 5 6 7
Subjective Financial Literacy
2.50
2.00
1.50
1.00
0.50
0.00
1 2 3 4 5 6
Objective Financial Literacy – Total Number of Correct Answers
Figure 2.
The relationship Notes: For Panel A, because the number of observations in groups 1 and 2 was small
between financial (n = 4, 27), the two groups are combined and labeled 2. For Panel B, because the number
literacy and opinion
leadership of observations in groups 0 and 1 was small (n = 8, 27), the two group are combined and
labeled 1
demonstrate low opinion leadership. Because the measurement scales used for objective Subjective and
and subjective knowledge are scaled differently, we cannot directly calculate the objective
difference between the two measures. Therefore, we divided each of objective and SFL financial
measures into three groups – low, average, and high – and explored financial literacy
miscalibration among participants. We calculated the cut-off points for three equal-sized literacy
groups for OFL and SFL. In line with our previous analysis on OFL, individuals
who answered five or six questions correctly were ranked high, those who answered
0, 1, or 2 questions correctly were ranked low and others who answered 3 or 4 questions
were ranked average. The results did not change when we moved the group with two
correct answers from low to moderate. For SFL, respondents with an average of 5.66 or
higher were ranked high, those who had an average of 3.33 or lower on SFL were ranked
low, and those who answered an average of 3.66-5.33 were ranked average. The resulting
final groups did not end up with exactly equal sizes because multiple respondent
have given each response. Moreover, identifying cells based on two variables – OFL and
SFL – further enhanced the differences between the cell sizes.
Table IV displays the number of participants in each cell based on SFL and OFL.
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The highlighted cells in the middle diagonal row in Panel A of this table represent whose
SFL and OFL are aligned with each other – they have the same level of OFL and SFL.
As this table displays, only a subset of respondents had a realistic perception of their
financial literacy: 53.6 percent for low OFL group (45 out of 84), 28.1 percent for those with
moderate levels of OFL (57 out of 203), and 41.2 percent for those with a high degree of OFL
(82 out of 199). In total, 37.9 percent of participants (184 out of 486) had realistic perceptions
of their financial literacy.
Moreover, a considerable percentage of respondents overestimated their financial literacy.
As Panel A of Table IV displays, this percentage was 46.4 percent among respondents with
low OFL (39 out of 84) and 23.2 percent among consumers with moderate OFL (47 out of 203).
In total, 17.6 percent of all respondents (86 out of 486) overestimated their financial literacy.
The analysis also found that a large percentage of consumers have negative financial literacy
miscalibration – they underestimated their financial literacy. This percentage was 58.9 percent
among consumers with high OFL (117 out of 199) and 48.8 percent among respondents with a
moderate OFL (99 out of 203). In summary, only 37.9 percent of participants had realistic
perceptions of their financial literacy (no miscalibration), 17.7 percent of all respondents
overestimated their financial literacy, and 44.4 percent underestimated their financial literacy.
In summary, a high percentage of consumers with low OFL rated their SFL as high and in
Discussion
This paper makes three key contributions in the areas of financial literacy, consumer
knowledge, and opinion leadership by exploring: the relationship between OFL and SFL; the
relationship between OFL and SFL on the one hand and opinion leadership on the other
hand; and the behavioral outcomes of OFL with regards to using retail banking services.
Table V provides a summary of these key findings.
OFL vs SFL
Due to the challenges entailed in measuring consumer objective knowledge, researchers
have measured consumers’ subjective knowledge as a proxy for objective knowledge
(Coulter et al., 2002; Midgley and Dowling, 1993). In the area of financial literacy, this study
Panel A. Owning checking and savings accounts
100.0% Subjective and
100.0% 95.6%
88.6% 87.8% 87.8%
91.9% objective
90.0%
75.2% 75.7%
financial
80.0% 75.0%
literacy
70.0% 63.3% 61.1%
57.1%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
1 2 3 4 5 6
Objective Financial Literacy
(Total Number of Correct Answers)
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90%
80%
70%
60%
50% No Response
0%
1 2 3 4 5 6 Figure 3.
Objective Financial Literacy The behavioral
(Total Number of Correct Answers) outcomes of objective
financial literacy
No Response 1-2 Times a week 2-3 Times a Month 0-1 Times a Month
Henry et al. (2013) found that when consumers have problems with their credit cards,
such as in paying their balances, they often perceive themselves as vulnerable and feel less
responsible for their financial problems and blame the credit card companies. The results of
this study offer additional reasons for why consumers often may not take responsibility for
their financial failures. Lack of awareness about their state of financial literacy may make
financially illiterate consumers even more vulnerable to fraud and deceptive marketing
activities (Hadar et al., 2013; Morrin et al., 2012).
Many financial institutions such as Visa (2016) and MasterCard (2016) have recently
developed customer financial literacy programs. Bank of America has created online
YouTube videos in order to improve consumers’ financial behavior and money habits. Many
governmental agencies and educational institutions (e.g. The United Nations Association of
the USA) have also designed financial literacy curriculum (United Nations Association,
2014). However, there are concerns regarding the effectiveness of these programs in the long
term (Huston, 2010; The Economist, 2014). Participants’ motivation is a critical factor in the
success of every educational program. This study finds that financially illiterate consumers
are often unaware of their lack of financial literacy, and hence lack the motivation to
improve. These educational programs, public media, and financial industry should focus on
increasing financially illiterate consumers’ awareness of their lack of financial literacy and
the importance of this knowledge to their financial well-being.
decisions are misguided from a financial perspective, especially given that most other retailers
in the USA offer payment installment options. For example, consumers can finance the
TV listed in Table VI for 18 months from Best Buy with 0 percent interest, leading to about
$50 monthly payments for 18 months plus a nominal application fee. Both the monthly
payments and the total cost of this offer will be significantly lower than the $129.99 (store 1) or
about the $159 (store 2) monthly payments from rent-to-own stores. The customer will pay the
total retail price of the product after only a few months of paying inflated installments to
rent-to-own stores. Consumers who lack a decent credit status may not take advantage of
installment offerings at mainstream retailers, but they can rent from rent-to-own stores.
However, these consumers should take extra caution when making purchasing decisions with
the intention of improving their financial situation as paying substantial prices to rent-to-own
stores may not be the best option for them.
Despite the fact that the decision to shop at rent-to-own stores is suboptimal for
consumers[4], the industry has grown significantly to about $8.5 billion annually with
8,900 stores in North America, serving 4.8 million households at any given time. Moreover,
the majority of rent-to-own customers are low-income families – 41 percent had annual
household income of less than $24,000 and 96 percent earned less than $50,000 a year
(www.rtohq.org/about-rent-to-own/). While these families need to make optimal financial
decisions, they mismanage their scarce resources by making poor financial decisions.
Not only are these consumers perhaps unaware of the detrimental effects of their decisions
on their financial well-being, but they may also lead their peers into engaging in such
shopping behavior.
Rent-to-own Rent-to-own Avg. rent-to- Amazon. Best Sears Avg. retail Average
Product (Store 1) (Store 2) own price ($) com ($) buy ($) ($) price ($) ratiob
Kitchen appliances
Refrigerator (Frigidaire 18 cu. Ft. Top Mount $69.99 × 24 mos $22.00 × 52 wks 1,411.88 599.00 529.99 629.99 586.33 2.41
Freezer-Black) ¼ $1,679.76c ¼ $1,144.00
Stove (Frigidaire 30” Smoothtop Electric Range $146.99 × 12 mos $34.00 × 52 wks 1,765.94 604.99 579.99 664.99 616.66 2.86
Stainless Steel) ¼ $1,763.88 ¼ $1,768.00
Dishwasher (Whirlpool Portable Dishwasher White) $109.99 × 12 mos $31.00 × 52 wks 1,465.94 629.00 629.99 699.99 652.99 2.24
¼ $1,319.88 ¼ $1,612.00
Electronics
TV (LG 55"Class LED (2160p) Smart 4 K Ultra HD $129.99 × 24 mos $37.00 × 52 wks 2,521.88 897.00 899.99 854.95 883.98 2.85
TV – Gray Black) ¼ $3,119.76 ¼ $1,924.00
Speakers (LG 2.1 ch 320 W Soundbar with Wireless $34.99 × 24 mos $10.00 × 52 wks 679.88 217.00 219.99 217.00 218.00 3.12
Subwoofer and Bluetooth Connectivity) ¼ $839.76 ¼ $520.00
Tablet (Galaxy 9.7) $74.99 × 12 mos $14.00 × 52 wks 813.94 239.00 229.99 229.99 232.99 3.49
¼ $899.88 ¼ $728.00
Laptop (HP Star Wars Special Edition 15.6” Intel Core i5 $99.99 × 18 mos $22.00 × 52 wks 1,471.91 849.99 799.99 701.00 783.66 1.88
Notebook) ¼ $1799.82 ¼ $1,144.00
Household appliances
Air Conditioner (Frigidaire – 12,000 BTU Window $54.99 × 12 mos $17.00 × 52 wks 771.94 360.00 359.99 434.95 384.98 2.01
Air Conditioner – White) ¼ $659.88 ¼ $884.00
Washer and Dryer (Frigidaire White Washer And $129.99 × 24 mos $48.00 × 52 wks 2,807.88 1,179.00 1,259.99 1,636.74 1,358.58 2.07
Electric Dryer Combo) ¼ $3,119.76 ¼ $2,496.00
renttoown price c
Notes: aThe prices of each product from different retailers are captured for identical products on the same day; Average Ratio ¼ Average
Average retail price ; “mos” stands
for number of months and wks stands for number of weeks. Rent-to-own stores only report the amount of payment per period and not the total price
objective
literacy
Subjective and
other retailersa
A comparison of rent-
IJBM from each other in terms of a certain attribute and homophily captures the degree to which
consumers are connected to others like themselves (Nejad et al., 2015, 2016). Future studies
can explore these two critical factors with regards to financial literacy to better understand
how a society’s financial literacy is formed.
The study established the relationship between several critical variables. Future research
can enhance these findings by examining the underlying consumer attributes between those
who are financially literate and those who lack financial literacy. To what degree are the
differences between these two groups due to their individual factors such as their cognitive
abilities vs environmental factors such as education and social influence? Finally, the study
was conducted on consumers in the USA. It will be interesting to replicate the study using
samples from other countries and compare the results across different cultures.
Notes
1. This quote is often used as “real knowledge is to know the extent of one’s ignorance.”
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He who knows, but knows not that he knows; Needs to wake up, help him open his eyes!
He who knows not, but knows that he knows not; Drags his limping mule, across the lows and
the highs!
But he who knows not, and knows not that he knows not; Wallows in the deep darkness of
ignorance, until the day that he dies!
(Ebne Yamin, Persian Poet 1285-1367, Original Translation to English by Isabel Burton 1831-1896).
3. The names of rent-to-own stores are available from the author.
4. We do realize that renting instead of owning may be optimal for some consumers who need a
product for a limited period of time. However, with the additional costs currently charged by rent-
to-own stores, such decisions are suboptimal from the perspective of financial cost of ownership.
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Corresponding author
Mohammad G. Nejad can be contacted at: mnejad@fordham.edu
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