Towards a measure of perceived financial capability

 

There is a growing interest in understanding the psychological and cognitive components that affect financial decisions. With factor analysis we produce a single measure of perceived financial capability from five items in the 2009 Canadian Survey of Financial Capability (N = 15,519). After adjusting the measure for the influence of income, we find through bivariate analysis and multiple regression that younger individuals and females have low levels of perceived financial capability. Results indicate that perceived financial capability is conceptually distinct from objective financial knowledge. Approximately 65% of the correlation between perceived financial capability and financial knowledge was unexplained by the covariates. This Figure shows how financial capability and financial knowledge scores (both standardized) vary across the life cycle. Between ages 25 and 55 there is a pattern of under-estimation. After age 60 people tend to overestimate their ability to manage finances. Understanding perceived financial capability is but one component of the broader concept of comprehensive financial capability that also includes objective knowledge and the opportunity to act.

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