Financial Literacy in the US: A Robustness Check of the Lusardi-Mitchell Questions

This study tested the reliability of financial literacy measures used in previous studies based on a set of items referred to as the "Lusardi-Mitchell questions". Using a sample of 514 American adults that completed a questionnaire with fifty financial literacy items, the authors compared (1) the results from a set of multivariate regression analyses that used the Lusardi-Mitchell questions to investigate the explanatory power of financial literacy on different financial behaviors, with (2) results that used alternative financial literacy measures that differ by the topic of the items or the number of the items. The study also addressed the reverse-causality issue in an attempt to develop a measure of financial literacy that is not biased by the learning-by-doing effect that could justify the hypothesis that individual financial knowledge is the consequence (and not the cause) of financial behaviors. Results suggest that the Lusardi-Mitchell questions provide a measure of financial literacy that is close to the results obtained by the use of more sophisticated measures. In addition, the results supported the hypothesis that the main relationship between financial literacy and financial behavior sees the former affect the latter, denying the reverse causality hypothesis.