Broadening the Scope of Financial Literacy to Incorporate Self-Control, Budgeting, and Heuristics

31 Pages Posted: 21 Aug 2019

See all articles by Hersh Shefrin

Hersh Shefrin

Santa Clara University - Leavey School of Business

Date Written: August 17, 2019

Abstract

Current measures of financial literacy focus on knowledge, and the literature on financial literacy has described important findings about the extent and impact of limited financial knowledge across the population. This paper discusses issues associated with broadening the scope of the financial literacy approach to include behaviors related to self-control, budgeting, and heuristics. Although the financial literacy literature models financial literacy as human capital in a neoclassical optimization framework, the discussion suggests that properly modeling this type of human capital cannot be easily accomplished through a neoclassical optimization model in which human capital is treated as a generic stock variable. Rather, budgetary human capital needs to be modeled explicitly as part of psychologically feasible heuristic processes that govern household behavior. In this respect, human capital involves more than fact-based knowledge and computational ability, but also mental processes that underlie action. Human capital pertains to both "knowing'' and "doing.'' Financial literacy in the form of knowledge can only produce better decisions when paired with human capital associated with acting on that knowledge.

Keywords: financial literacy, spending, borrowing, saving, self-control, heuristics

JEL Classification: A10, B3, D14, D9, G4

Suggested Citation

Shefrin, Hersh, Broadening the Scope of Financial Literacy to Incorporate Self-Control, Budgeting, and Heuristics (August 17, 2019). Available at SSRN: https://ssrn.com/abstract=3438681 or http://dx.doi.org/10.2139/ssrn.3438681

Hersh Shefrin (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

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