Financial Literacy

Running head: FINANCIAL LITERACY1
Financial Literacy: Literature Review
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Financial Literacy: Literature Review
1. Introduction
Today, financial literacy might be one most important aspect of modern life. Managing money reflects, if anything, an ability to make sound financial decisions. The reality is, however, most people do not have enough financial literacy to manage money well. The United States is a clear case in point. Having received young formal or informal guidance on financial matters, many American youth are not ready to make sound financial decisions and choices and, as a result, have accumulated an average student debt rising from $18,550 (in 2004) to $28,950 (in 2014) (“Facts About Youth Financial Knowledge & Capability,” n.d.). This financial illiteracy is, in fact, rampant and cuts across many consumer, professional and student segments. In a study investigating financial literacy among university students in eight European countries ( Estonia, Germany, Italy, Netherlands, Poland, Romania, Russian Federation and Turkey), Ergün (2017) shows that a combination of student major (business), university degree (PhD), household income (high), peer financial advice, and former participation in a financial course contribute to more financial literacy. Despite all efforts to define and set up programs for financial literacy and expanding financial education, such as The Financial Literacy and Education Commission (FLEC)'s financial literacy education website (“MyMoney.Gov: Expanding Financial Education and Access,” n.d.) growing complexity of modern economy has made a general, acceptable definition of financial literacy unfeasible possible
Background on Financial Literacy
The growing overlap between consumer behavior, economic complexity and product/service diversity has made financial literacy a much less straightforward concept and
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practice. In contrast to a few decades ago, consumers were used to clearly defined products and services provided at slightly unchanging prices and, if changing, were predictable. Moreover, products and services in any given area of economic activity were offered by known producers and service providers all physical and present for consumers to select from and, if unsatisfied, to switch from. Today, products and services originate thousands of miles away, add up costs on a long shipping journey and, once received, are for consumer’s own judgment to keep, offer a feedback on or return. The complexity of modern day service economy has, put more specifically, made financial literacy more problematic. The financial knowledge once suitable for clearly defined products and services provided in certain markets at predictable prices is no longer applicable to current state of affairs. Unsurprisingly, financial literacy has come to be an issue of growing concern not only for general consumer public at large, as has been for so long, yet for a wide range of stakeholders. Indeed, financial literacy has evolved such as to raise calls to introduce new innovative methods of instruction at business schools in order to close a gnawing gap between conceptual, financial knowledge gained in class and a completely different financial, practical knowledge required at home, work and in everyday life.
There is, in fact, a growing body of literature emphasizing financial literacy not only for a “one-go,” as is common in many business education programs, yet as an ongoing process for business and non-business majors. Rosacker and Rosacker (2016) find out, in a study conducted on a small mid-western university to deliver financial literacy workshops aimed at specific student segments, a parsed, i.e. more integrated, approach to financial literacy is more effective compared to a single personal finance course. The most important outcome, emphasize Rosacker and Rosacker, is a financial literacy education of enduring value and, more importantly,
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a constant process of financial knowledge acquisition regardless of student major and/or personal interests.
The significance of financial literacy might assume an ironic meaning for small and medium enterprise (SME) entrepreneurs. Typically, business owners are assumed to be financially astute and knowledgeable. In a UK-based study about state of financial literacy among SME entrepreneurs, Hussain, Salia and Karim (2018) find many entrepreneurs struggling to apply for loans and perform sound financial management. The study authors emphasize financial literacy as a critical skill for SME owners not only to reduce monitoring cost and optimize a firm’s capital structure yet, more importantly, to “mitigate information asymmetry between lenders and borrowers.” This latter observation is particularly important. By closing gaps between service providers (in current case lenders) and service recipients (i.e. borrowers or business owners), SME entrepreneurs are less prone to manipulations lenders, particularly under crisis conditions, manipulations often leading up to insurmountable debts and, in many cases, insolvency.
From a communication perspective, financial literacy is shown to be enhanced by more communication in family settings. In contrast to a conventional approach to student financial literacy, Hanson and Olson (2018) show students having more family conversations to be more financially knowledgeable – and, consequently, more capable of making sound financial decisions – compared to students decision-making is made on a conformity-based approach in family. The question of family conversation about financial matters is, in fact, of far-reaching implications and could apply to as many contexts as possible beyond family. Specifically,
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conversations about financial literacy could be a matter of information exchange in order to close information gaps usually found between product/service providers and customers.
Current Research
The question of financial literacy continues to generate more academic debate and research. In more recent years, a growing body of literature has focused on financial literacy in classroom settings, particularly among business majors. Given growing use of multimedia resources, including videos, in classroom settings for learning purposes, more literature has, moreover, discussed effectiveness of video delivery to enhance financial literacy of business majors. Kuntze, Wu, Wooldridge and Whang (2018) perform a study on business majors using a video learning module to explore efficacy of video learning in improving financial literacy among investigated students. The study confirms efficacy of video learning not only for quantitative business majors yet also for non-quantitative majors (i.e. marketing). Using video learning methods, Suparti et al. (2018) show financial knowledge of business majors in Indonesia improve and consumption behavior reduced compared to earlier patterns.
Improving financial literacy in college of business s...