The interaction of financial attitudes and financial literacy: Evidence for low-income hispanic families

We add to the literature on the connection between financial literacy and financial attitudes and a wide range of financial outcomes, with an emphasis on low-income, predominantly, Hispanic families, a demographic group that has received relatively less attention in the literature.  We ask two research questions.  First, do financial attitudes and financial literacy help to explain variation in financial outcomes for this demographic group?  Second are there important interaction effects between financial attitudes and financial literacy in explaining variation in financial outcomes. We carry out the analysis using unique survey data from low-income families on financial literacy, attitudes toward delaying gratification, risk aversion, and savings and financial outcomes related to saving and asset ownership.  Using a sample size of 137 observations, we find that savings and asset ownership are generally low among these low-income households.  Yet, in our binary probit specifications we find that financial knowledge and financial attitudes do help to explain the variation we do observe in these financial outcomes.  For example, a one-standard deviation increase in our financial knowledge index increases the probability that an individual has savings set aside for emergencies by 12.4 percentage points, has savings set aside for children’s college by 12.2 percentage points, has savings in a 401K or IRA by 10.2 percentage points, and has investment accounts by 13 percentage points.   In the key area of savings in an investment account, in addition to finding an overpowering presence of the importance of financial knowledge, we are able to show the importance of self- reported knowledge of the stock market.  This finding implies that attempts to educate households who are left out of the mainstream of owning investment accounts will be worthwhile.  Financial attitudes show a much weaker association with financial outcomes, controlling for financial literacy and other household and personal characteristics.  However, there are salient effects of attitudes on outcomes when attitudes are interacted with literacy. A willingness to take on risk, for example, shows no association with asset holdings conditional on financial literacy, yet is shown to be associated with a 12.1-percentage point increase in the probability of holding land or rental property and a 4.7-percentage point increase in the probability of holding investment accounts for those individuals in the 95^th percentile of financial literacy distribution.

JEL codes: D14, D19, J13