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What Causes Suboptimal Financial Behaviour? An Exploration of Financial Literacy, Social Influences and Behavioural Economics


Angelo Capuano


Monash University - Faculty of Law

Ian Ramsay


University of Melbourne - Law School

March 23, 2011

U of Melbourne Legal Studies Research Paper No. 540

Abstract:     
This research report is part of a project, funded by the Australian Research Council, which will contribute to a broader understanding of the role of financial literacy and consumer behaviour in Australia. The research report explores the causes of financial behaviour and considers whether suboptimal financial behaviour has causes other than lack of financial literacy. Part A of the research report explains the importance of financial literacy. This part identifies the benefits of financial literacy to consumers, the community, the economy and the financial markets. Part B explains the meaning of financial literacy. This part reviews financial literacy surveys conducted worldwide and refers to academic literature to explain the key competencies and proficiencies of a financially literate consumer. Part C outlines the flaws in the decision making processes of consumers when choosing financial products. Part D identifies social, psychological and cognitive causes of suboptimal and irrational consumer behaviour. It considers social influences on financial behaviour such as wealth, income, social capital as well as psychological biases and heuristics studied in behavioural economics and neuroeconomics. It is shown that suboptimal consumer decisions have many causes, not just financial illiteracy. Part E reviews 23 financial literacy surveys to explain how financial literacy is measured. It also identifies common findings among the surveys. The Appendix to the research report provides a summary of 23 financial literacy surveys from the World Bank and a number of countries including Australia, the UK, US, Italy, the Netherlands, Singapore, Japan, Austria, Ireland and Russia.

Number of Pages in PDF File: 244

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Date posted: March 28, 2011 ; Last revised: May 28, 2011

Suggested Citation

Capuano, Angelo and Ramsay, Ian, What Causes Suboptimal Financial Behaviour? An Exploration of Financial Literacy, Social Influences and Behavioural Economics (March 23, 2011). U of Melbourne Legal Studies Research Paper No. 540. Available at SSRN: http://ssrn.com/abstract=1793502 or http://dx.doi.org/10.2139/ssrn.1793502

Contact Information

Angelo Capuano (Contact Author)
Monash University - Faculty of Law ( email )
Wellington Road
Clayton, Victoria 3800
Australia
Ian Ramsay
University of Melbourne - Law School ( email )
Victoria, 3010
Australia
+61 3 8344 5332 (Phone)
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