The impact of financial literacy on risk and time preferences and financial behavioural intentions
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Date
2019
Authors
Mudzingiri, Calvin
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
Financial literacy plays a pivotal role in influencing financial behaviour, risk preferences as well as time preferences which in turn impact on financial life outcomes of individuals such as saving and investment. There is documented evidence on variation in financial life outcomes of people with high financial literacy when compared to individuals with low levels of financial literacy. Financial literacy is also weakly associated with individual cognitive ability, which makes it important to examine its relationship with financial behaviour, risk preferences, time preferences and individual characteristics. This study explores the impact of financial literacy on risk preferences, time preferences and financial behaviour of university students. It seeks to examine whether there are differences in financial behaviour, confidence level, risk preferences and time preferences of university students with high financial literacy when compared to those students with low financial literacy. It also investigates the determinants of financial behaviour of university students. The data used in the study was gathered from university students enrolled in undergraduate bachelor of commerce degrees at University of the Free State in South Africa. Data was collected by way of a questionnaire, multiple price list time preferences and risk preferences experimental tasks, financial literacy test as well as a binary choice time preference task. All students that scored a financial literacy test mark above average were categorised as high financial literacy group while those who score a financial literacy test mark below average were classified as low financial literacy group. The study examined descriptive statistics, used t-test and regression models in the analysis of data. Our analysis was split along financial literacy and gender. First, the study found out that financial literacy is associated with risk preferences and time preference choices of university students with low levels of financial literacy. The research also concluded that indecisiveness or indifference shown by multiple switching on risk preferences and time preference choice options increases as financial literacy decreases. The paper also found low levels of financial literacy among university students. Second, the study found out that financial behaviour, confidence, risk preferences and time preferences significantly differ between university students with low financial literacy when compared to students with high financial literacy. Low financial literacy level university students were found to be more risk loving, overconfident and more impatient compared to university students with high financial literacy. The research also concluded that confidence, risk preferences and financial literacy perceptions are significantly related to financial behaviour of categorised university students. Third, the study findings show that financial literacy is associated with a patient behaviour, that is, a low discount rate in university students. Highest level of education in a household was also found to be significantly related to time preferences of university students, showing a positive externality of education. Finally, the research concluded a reverse causality between financial literacy and time preferences. The study results show that financial literacy education benefits more university students with low levels of financial literacy than university students with high financial literacy. Providing financial literacy reduces mistakes in making risk preference and time preference choices by university students. Availing financial literacy can provide the right dose of confidence, risk aversion and patience in university students.
Description
Thesis (Ph.D. (Economics))--University of the Free State, 2019
Keywords
Financial literacy, Financial behaviour, Risk preferences, Time preferences