A consideration of the current landscape of financial capability has been presented, based on the literature and existing indices of financial capability. Financial capability is modeled as a function of financial knowledge, behaviour, attitudes and psychological factors, including control variables for income, wealth and socio-demographic factors. For this study, financial capability is defined as a person's ability to make healthy finances.
For example, an individual's tendency to spend impulsively can often lead to poor financial behavior and lower levels of financial capability. Researching levels of financial capability is an important step towards improving the financial wellbeing of New Zealand in general. The index design process will use proxies of financial knowledge, financial behavior, financial attitude and psychological factors to understand their combined predictive power in measuring the level of financial capability.
Financial capacity is described as the combination of financial knowledge, financial behavior and other 'noise factors' that influence the decision-making process. For our study, financial wealth is defined as a state in which an individual has sufficient knowledge and attitudes to guide financial decision making toward financial well-being, given an individual's personal financial circumstances. Existing measures of financial capacity have been developed based on the premise that financial capacity is a combination of financial knowledge, behavior and attitudes.
Aim of the present research
This is an excellent and comprehensive first attempt to develop a measure of financial capability in New Zealand. The Financial Services Authority developed the Adult Financial Capabilities Framework using two waves of interviews with 33 people. Apart from attitudes towards spending, saving and planning, this research does not capture the impact that additional psychological factors may have on determining financial capability.
US "Jump$tart" Survey • This 2020 survey looks broadly at financial behavior and knowledge, while also capturing some information on the subjective well-being and confidence of a sample of US adults. The purpose of this study is to develop a new standardized index to effectively measure financial capability levels in New Zealand. The indexing process will use proxies for financial knowledge, financial behavior, financial attitudes and psychological factors to understand their combined predictive power to measure levels of financial capability.
Therefore, investing in the development of financial capacity is essential to improve the financial well-being of individuals as well as society as a whole. Within behavioral economics discourse, the relationship between psychological influences and economic behavior has been researched more widely. Research shows that several behavioral biases influence financial decision-making, which explains a large part of the variance in an individual's level of financial ability (Kiymaz et al., 2016; Ritter, 2003).
It is therefore clear that financial behavior and the decision-making process are influenced by the level of information gathered as well as by various psychological factors. However, recent behavioral studies of finance have explored the link between psychological factors and financial decision making. The development of a modified index of financial capability will not only be useful for measuring current levels, but also.
This study contributes to the literature by proposing a unique index of financial capability that extends current indices by including a separate measure of psychological influences in line with contemporary behavioral finance research. Therefore, we propose measuring financial ability as a combination of financial knowledge, financial behavior and psychological factors.
Method
Sample
Although this questionnaire was taken in 2017, the closest comparison for the ethnic composition of the New Zealand population is the 2018 Census of New Zealand. Therefore, the ANZ data set used for this study is somewhat representative of the ethnic composition of the wider New Zealand population, with two notable exceptions. Māori are underrepresented in the survey with only 10.1% of respondents identifying with this ethnic group, compared to 16.5% of the general New Zealand population.
The 'other' ethnic category is largely over-represented compared to the percentage of individuals identifying with this category in census statistics. The survey included questions about demographics, financial habits, financial well-being, financial capabilities, financial knowledge, financial attitudes/motives, and some additional questions related to retirement, costs of housing stress, and the ease with which one's financial situation can be discussed. Categorical responses were given numerical values, allowing easy use of SPSS to calculate the index. However, data cleaning and manipulation was required to ensure the data was in a usable state.
Factor analysis
As in Fünfgeld and Wang (2008), factor components were generally retained based on the Kaiser criterion (eigenvalue of 1.0 or above) and scene plot analysis. Using the varimax rotation technique, only items with factor loadings of 0.4 and above were retained. Although the general practice is to retain items with factor loadings above 0.3, this factor loading threshold and the choice of orthogonally rotated items were justified to reduce duplicate item loadings.
After factor analysis, the retained components were calculated by multiplying the factor loading by the data item value. These retained components were used to calculate the independent variables for regression analysis, namely financial knowledge, behaviour, attitudes and psychological. The variables were calculated using a weighted sum of retained components, where the weights were calculated based on the percentage of variance explained.
Regression analysis
Results
Factor analysis
How often do you need to borrow money or go into debt to buy food or pay expenses because you run out of money. I always make sure I have money saved for bad times * 0.797 How often do you save money to cover it. Planning how money is spent in your household * 0.915 Providing for regular household expenses, e.g.
Which of the following best describes the extent to which you control your general household expenses/. The item 'I find it more satisfying to spend money than to save it' loaded on two components, but it has only been retained in the calculation of the impatience variable due to the higher factor loading. I prefer to buy things on credit instead of waiting and saving up 0.706. I prefer to spend the money I have instead of saving it for unexpected expenses.
I find it more satisfying to spend money than to save it. I'd rather cut it than spend my daily spending on a credit card I couldn't afford. In this case, the Kaiser criterion and the scree plot do not match as a selection criterion for the number of retained factors.
Formation of the variables
Equations 2, 3, 4, and 5 show the calculations of the new financial knowledge, financial behavior, financial attitudes, and psychological variables, respectively.
Multiple regression
To test the robustness of the model, the regression equation derived from the base data set was applied to the test data set. Descriptive statistics were then compared to assess the accuracy of the regression equation in predicting an individual's financial ability score based on their financial knowledge, financial behavior and psychological score and controlling for income and other socio-demographic factors. For ease of interpretation and comparison, financial ability scores from the baseline and test groups were converted to a score out of 10 using a multiplier of 2.353.
To further confirm the predictability of the regression model, a difference of means test was applied to the financial capacity and financial capacity index scores from the test dataset. This analysis tests the null hypothesis that the means of the two sample groups, in this case the financial strength scores and the financial strength index scores, are equal (that is, the mean difference is zero).
Discussion
Main findings
This study finds strong evidence to support that financial behavior explains the largest portion of the variance of financial ability scores with a regression coefficient of 0.121, which is significant at the 5% level. The coefficient of financial knowledge explains relatively less variance in financial ability with a coefficient of 0.017, which is only significant at the 10% level. This suggests that financial knowledge has a limited impact on financial capability when considered separately from other factors such as financial behavior and decision-making.
Now to the experimental evidence on the impact of behavioral biases on financial ability. With a coefficient of 0.033, psychological factors have a small but significant (at the 5% level) impact on financial ability. This confirms predictions from the literature on the influence of psychological factors on the decision-making process.
Research has shown that individuals often rely on heuristics to guide decision-making, to avoid the complexity of weighing the likelihood of different outcomes. The findings of this study confirm that psychological factors have a statistically significant influence on financial capabilities, due to their direct influence on decision-making. However, these findings suggest that the level of impact, over and above what is already captured by the financial behavior variable, is minimal.
Limitations
Conclusions
Financial well-being: A conceptual model and preliminary analysis Retrieved from https://www.bristol.ac.uk/media-library/sites/geography/pfrc/pfrc1705-financial-well-being-conceptual-model.pdf. Measuring Financial Capability: A New Instrument and Results from Low- and Middle-Income Countries International Bank for Reconstruction and Development / World Bank. Financial literacy and the need for financial education: evidence and implications Swiss Journal of Economics and Statistics 155(1).
The role of cognitive skills on financial literacy: new experimental evidence Journal of Behavioral and Experimental Economics, 84. Retrieved from https://www.oecd.org/daf/fin/financial-education/OECD-INFE-International-Survey-of -Adult-financial-literacy-competencies.pdf. Retrieved from https://www.stats.govt.nz/news/ethnic-group-summaries-reveal-new-zealands-multicultural-make-up.
Financial capacity for well-being: An alternative perspective from the capacity approach Retrieved from https://www.econstor.eu/bitstream pdf. Subjective self-control, but not objective measures of executive function, predicts financial behavior and well-being.
