Financial Literacy and Financial Well-being

Abstract

We investigate the effect of financial literacy on a widely used measure of financial well-being while controlling for socioeconomic and behavioral factors. We analyze the survey data from the 2018 and 2021 National Financial Capability Study (NFCS) by the Financial Industry Regulatory Authority (FINRA). Our analysis employs three models to estimate the causal effect of financial literacy on financial well-being: a multiple linear regression model, a two-stage model using regularized Bayesian linear regression, and a two-stage model using Bayesian Causal Forests to study treatment effect heterogeneity. We find a surprising result: the treatment effect of financial literacy on well-being is negative, significant, and robust across all three models. This finding holds implications for financial education policymakers and consumer scientists whose work focuses on financial literacy, financial well-being, and overall well-being. By revealing diverse treatment effects across various subgroups, our study identifies demographic groups more susceptible to the adverse impact of financial literacy on financial well-being. Consequently, tailored strategies will better allocate financial education away from those penalized by good intentions.

Keywords: Financial literacy, Financial well-being, Regularization, Bayesian, Causal inference, Regression trees