Determinants of Financial Literacy: Evidence from Spain

This paper investigates the impact on financial literacy of a variety of personal and psychological traits as well as the exposure to peers with higher financial knowledge. Using survey data from Spain, we have measured financial literacy using questions from Lusardi and Mitchell (20011b) and applying a Ridit scoring method, which weighs each question by difficulty. In contrast to previous studies, we focus on many behavioral factors and psychological variables related to financial outcomes, such as overconfidence, cognitive ability, self-control and the effect of learning from peers, amongst others. As in prior research, our data shows that the majority of respondents display low financial knowledge, failing to distinguish between a credit and a debit card or understanding the time value of money. In particular, we find that overconfidence has a huge impact on financial literacy, suggesting the necessity of expanding financial education programs in order to make people aware of being poorly calibrated to the financial world. Similar to Meier and Sprenger (2013), our empirical work shows that time preferences are highly correlated with financial knowledge. More patient individuals are more inclined to educate themselves financially. To the extent that the degree of patience is an endogenous variable, virtue-ethics type considerations may be important in grooming the next generation.